How Much Should I Be Saving for Retirement?
How much money is enough to retire? According to three oft-cited retirement savings rules of thumb, the magic number is …
- $1 million to $2 million.
- Seven to 13.5 times your salary in savings by age 67.
- 15% of your income annually starting in your 20s.
Each of these retirement savings guidelines takes a slightly different approach to answering the question of how much money you need for retirement. They all provide useful takeaways. But the real question is: Do they apply to you?
Let’s dig into the assumptions behind the numbers and see.
A quick gut check
A retirement savings benchmark provides a snapshot of how your current nest egg measures up to a future savings goal. It also has the potential to freak you out. Try not to do that. (Easier said than done, we know.) Just know that while you are saving, your investments are doing a lot of the heavy lifting, helping close the gap between how much you have and how much you’ll eventuall need to fund your retirement. That compound growth starts to work the moment you get your money into your retirement account.
1. Do you need to save $1 million to $2 million to retire?
There was a time when $1 million was the go-to number in headlines about how much is needed to retire. Over time, that figure has crept even higher.
As a stand-alone savings target, it’s not that enlightening, especially for someone who's just been handed the 401(k) plan paperwork at their very first job. (If this is you, we’ve got some practical savings advice for you here.) Even if you’ve been saving for decades, the million(s)-dollar target is riddled with unanswered questions.
Before you dismiss the multimillion-dollar headlines as clickbait fodder, let’s look at the math behind the high-dollar digits.
The assumptions behind the rule
Like any rule of thumb, context is key. You can get a lot more insight into whether the $1 million retirement savings goal applies to you by looking at exactly how much annual income a $1 million portfolio — or one of any size — would provide. (Spoiler alert: Although the dollar figures are interesting, the really important stuff to know is in the fine print underneath the table.)
How much you need in retirement savings
|If you want to withdraw this much every year …||… you’ll need this much in savings by retirement age|
The fine print: Assumes a 4% withdrawal rate from a balanced investment portfolio of stocks and bonds, and a 26-year retirement period.
Your income needs: This benchmark starts with the amount of money you need your portfolio to provide each year — your “retirement salary.” For example, if you want your portfolio to provide $40,000 a year in income for 26 years, based on the guidelines above you’ll need $1 million in retirement savings.
Sure, you could withdraw more than $40,000 a year from a $1 million portfolio. But that could drain your nest egg too quickly. This is where the next key assumption comes into play … the withdrawal rate.
How much of your pre-retirement income should you aim to replace?
45%? 70%? 80%? 90%? 110%? All of these are good guesses, and all are used by financial pros to calculate how much an average retiree will need to cover their costs.
Keep in mind that some key expenses disappear in retirement, and, no, we’re not talking about dry cleaning costs if you had a three-piece-suit kind of job. You’ll no longer be saving (so back out whatever percentage you were socking away), nor will you be forking over a percentage of pay for payroll taxes. The rest of your income needs will depend on your retirement lifestyle choices.
Also keep in mind that your savings may not be your only source of income in retirement. There’s Social Security (though the benefit amount for future generations is certainly a hot topic of debate), pension income (if you worked for a pension-paying employer), and any income you might generate in retirement from occasional work, Airbnbing your spare room, or your thriving Etsy enterprise selling custom potholders featuring the meme du jour.
Your withdrawal rate: The withdrawal rate is simply the percentage of a portfolio that is drawn down (withdrawn) each year during retirement. It sounds boring and mathy, but it’s extremely important. You cannot accurately predict how much is enough for retirement without knowing the ideal withdrawal rate — one that allows you to safely siphon enough from your retirement savings to cover expenses for the rest of your life.
Scholars and other math-inclined people have settled on 4% as a relatively safe withdrawal rate based on complex models taking into account historic market performance and best- and worst-case scenarios (like retiring in a down market). So, to flip the scenario described above, if you have $1 million in savings and can live off an income of $40,000 per year (4% of your savings), you can retire. Or can you? Read on…
Your retirement age and life expectancy: You can’t calculate a safe withdrawal rate without knowing how many years of withdrawals you’re dealing with. The 4% annual withdrawal rate from $1 million in savings example above assumes someone who needs their retirement savings to last roughly 25 to 30 years. Stop working earlier, and benchmarks like “save $1 million” break down as the odds of outliving your money go up.
Without the (terrifying) luxury of knowing exactly when someone will kick the bucket, retirement savings prognosticators rely on averages — retiring at age 65 to 67, living until at least age 90. (Though with modern medicine and our obsession with HIIT workouts, many planners recommend saving enough to fund life until age 95 to 100.)
» Read more: Learn what’s behind the 4% withdrawal rule in our next article on how to invest for retirement.
Other assumptions: There can be other moving parts to the million(s)-dollar retirement savings benchmark beyond age, spending needs and withdrawal rates. Whenever you see an all-purpose retirement savings guideline, look for the assumptions used for investment returns, inflation, taxes, and whether estimated Social Security benefits are included. (Next time you’re monkeying around with a retirement calculator, click the “don’t include Social Security” button for an instant punch in the gut. You’ll stop rolling your eyes at the “you need $1 kerjillion to retire” headlines.)
Does the “save $1 million for retirement” rule work for you?
Sure, if you’re a 65-year-old whose investments earn an average of 7% annually in an environment with 3% inflation and can live off $40,000 a year in retirement income and die on your 91st birthday. (Those are the assumptions used to create the table above.)
We’re being a bit cheeky to make the point that you must look at the assumptions behind any savings target that’s tossed out there. Context is key.
“You need $1million to $2 million to retire” is effective as a headline, less so as a practical rule of thumb for savers. Although generic dollar-based savings targets are calculated using key factors that go into determining retirement savings needs, the one-size-fits-most approach leaves zero room for nuance.
That said, if a terrifyingly huge dollar figure inspires you to get serious about saving for retirement, then, use it as a goalpost. If it gives you agita, then read on for a retirement savings benchmark that’s more tailored to your actual retirement savings needs.
2. Will having X times your salary in savings be enough to retire?
Is there anything more discouraging to a 30-year-old than being told they need to have $2 million in savings before they can retire? (We mean besides the obvious soul-crushing topics of geopolitical uncertainty, climate change and Ticketmaster junk fees.)
A better approach to answering the question of how much you should be saving for retirement comes from age-appropriate savings benchmarks — the amount you should aim to have in retirement savings at age 30, 40, 50 and so on.
Most big financial advisory firms offer aged-based retirement savings guidelines for those Googling “Am I saving enough for retirement?” Here’s a side-by-side comparison of the benchmarks at two big investment firms, Fidelity and T. Rowe Price:
How much of your salary should you have in savings at each age?
|Your age||Fidelity savings goal||T. Rowe Price savings goal|
|30||1 times your pre-tax income||0.5 times your pre-tax income|
|35||2||1 to 1.5|
|40||3||1.5 to 2.5|
|45||4||2 to 4|
|50||6||3 to 6|
|55||7||4.5 to 8|
|60||8||5.5 to 11|
|65/67||10||7 to 13.5|
Source: Fidelity, T. Rowe Price
Using Fidelity’s model, a 35-year-old making $75,000 a year would be considered on track for retirement if she has $150,000 (2x her annual income) in savings. T. Rowe Price’s model recommends having $75,000 to $112,500 saved for retirement (1x to 1.5x of annual income) by age 35. (p.s.: T. Rowe recommends higher earners use the bigger number in the range as a guidepost since less of their income will be replaced by Social Security.)
The assumptions behind the rule
Scouring the fine print — or clicking over to the lawyered-up PDF explainer behind each and every assumption used in the calculation — reveals how layered the calculations behind these seemingly simple savings guidelines really are. And knowing what the numbers are based on will help you see how closely these hypothetical examples apply to you.
Income needs: You can’t set a savings goal without knowing roughly how much you’re going to spend each year in retirement. Retirement savings benchmarks that are based on a multiple of salary take a smart mathematical shortcut by using a person’s current pre-tax income to determine post-retirement spending needs.
Fidelity assumes retirees will need enough in savings to replace 45% of their pre-retirement annual income. It excludes any income from a pension (because not many people have access to them these days), and doesn’t factor in potential Social Security benefits.
T. Rowe Price’s savings benchmarks assume a 5% reduction in spending compared to pre-retirement levels. It assumes you’ll be collecting Social Security benefits (based on SSA.gov’s calculations), which is why the savings multiplier is lower than Fidelity’s.
Retirement age: Both Fidelity and T. Rowe Price assume a standard retirement age of 67, and death roughly 25 years later. Reality check: A Gallup poll a few years ago found that the average retirement age was actually 61, despite many respondents saying they had planned to work longer.
Does that mean someone who is forced to retire at 61 will run out of money at age 85 if they follow the benchmark savings guidelines? Not necessarily, because statistically speaking, you may be dead by age 83!
Life expectancy: That dire bit of mortality rate data above is based on the Social Security Administration’s “How Much Longer Do I Have?” page (our sunshiney nickname, not theirs). The SSA’s actuaries found that 61-year-old U.S. males live an average of 21.01 additional years. The average 61-year-old woman’s lifespan is nearly 85, leaving her 24 years of retirement to cover with her savings. (Though keep in mind, that’s just an average and many people live longer than the average.)
All dark humor aside, moving your retirement due date forward or backward can significantly change the retirement savings calculation. For example, according to Fidelity, someone who delays retirement until age 70 will need 8x his preretirement income versus the 10x his preretirement income needed if he retires at age 67. Retire at 62, and the guideline is 14x your pre-retirement salary.
Other assumptions: There’s a lot more behind the “save X times your salary” rule of thumb, including assumptions for wage growth (which assumes you’ll be able to save more as your salary increases), inflation (based on historic averages), estimated investment returns (how portfolios constructed with age-based asset allocation models perform over time in all market scenarios), and annual withdrawal rates (most use the 4% industry standard we noted earlier).
Will having X times your salary in savings be enough for you to retire on?
Because this approach is essentially a multiple of your salary, it’s a more valuable retirement savings benchmark than shooting for some final pie-in-the-sky goal. The idea is that if you’re currently getting by on a salary of $X, having a portfolio that’s healthy enough to provide roughly $X in income per year will enable you to sustain your pre-retirement lifestyle till your final sendoff.
Although more practical than a random lump-sum savings goal, keep in mind that all of the assumptions are based on averages. What’s not taken into account are things that can greatly affect your savings needs:
- Your actual spending needs: The assumption is that everyone will need to replace roughly the same amount of income in retirement. Lost is the very real possibility that your expenses may go up or down in retirement based on a variety of personal factors, all of which can affect how long your savings will last.
- How you invest: Aggressive investors willing to take on more risk may outpace the average market returns, allowing them to retire earlier or have a higher withdrawal rate. More conservative investors may need a bigger nest egg — or to adjust their withdrawal rate down — to make up for the years that their money doesn’t keep up with inflation.
- Other sources of income: Pension income, rental income, pay from part-time employment, Social Security benefits — all these non-portfolio sources of income can affect the amount you need to save as well as how much you need to withdraw from your retirement savings to cover your expenses.
This approach is better than the general “save $1 million to $2 million” rule of thumb in that it provides waypoints along the retirement savings path. Using a multiple of your current salary – that is, the amount of money needed to fuel your actual life – gets you much closer to a workable retirement savings target.
Although the calculations behind the figures are pretty sophisticated, there’s still room for nuance. Moving a few of the pieces over time (say, working part time in retirement or moving to a cheaper locale) has the power to tailor the savings multiple to one that best suits.
3. Is saving 15% of your income enough?
Here’s a retirement savings benchmark you’ve probably heard a million times over: Save 15% of your income. Before you ask what we think you’re going to ask, the answer is “pre-tax” — as in, the retirement savings rule of thumb is to save 15% of your pre-tax (gross) income.
Something you might not realize is that the onus isn’t entirely on you to reach the magic 15% savings rate. Any employer match within a workplace retirement plan counts toward that 15%. So if you contribute 10% of your income to a company 401(k) and there’s a 5% employer match, you, my friend, are saving 15% of your income.
The assumptions behind the rule
The “save 15%” rule is the ultimate in simplicity — a savings calculation shortcut that, as it turns out, incorporates many of the same assumptions used in more complex retirement guidelines.
Fidelity modeled it out assuming that someone with a retirement age of 67 needs their retirement savings to cover 45% of their pre-retirement income until age 93 (the uplifting life expectancy variable). It assumes someone starts saving at age 25 (this is key, as you’ll see in a moment), average wage growth of 1.5%, historical average stock market returns (based on a typical target-date fund allocation), average tax rates (based on IRS data), and that income will be supplemented by Social Security starting at age 67.
Does the “save 15% of your income” rule work for you?
There’s a lot that can affect the applicability of the rule, everything from what age you retire to how much you’ve already saved to your investment returns.
But there’s nothing that impacts this simple rule of thumb more than when you start saving. (“Oh, to be young again,” said basically every single person who’s played what-if scenarios on a retirement calculator.)
According to Fidelity, if you start saving at age 30 instead of 25 you should aim to save 18% of your income. Wait until age 35, and if you have no existing nest egg, “save 23% of your income” is a more accurate guideline to follow.
Until the AI chatbots spit out step-by-step instructions on making a time machine, the best approach to the “save X% of your income” benchmark is to tailor it to your situation, making adjustments to your savings percentage based on your age and how much you’ve already saved.
Based on your savings multiple (your total retirement savings divided by your gross (pre-tax) income), T. Rowe Price recommends the following percentage-of-income based savings targets:
What percentage of your income to save for retirement
Source: T. Rowe Price. Based on a couple earning approximately $150,000 or a single person approximately $75,000. The calculations are based on someone who retires at age 65 and is retired for 30 years, using a 4% withdrawal rate. T. Rowe Price notes that someone whose income is higher may need to increase the savings percentages as they get older.
For example, a 35-year-old who makes $70,000 a year who has already saved twice her income ($140,000) in her retirement fund would be able to stay on track by saving 11%, according to T. Rowe Price calculations. A 50-year-old in the same situation would want to increase her savings rate to 23%. (It’s probably a good time to remind you that the employer match in a workplace retirement plan counts toward your savings percentage.)
On the surface, the “save 15% of your income” rule is a pretty solid guideline for a lot of people. More accurate for most would be: Save at least 15% of your income … 20% would be even better. But we don’t want to scare anyone away.
“Save 15% of your income” (including any employer match!) is a solid guiding principle for deciding how much to save for retirement. It works best if you start following the rule early in your career. If you’ve gotten a late start, you’ll want to adjust upward, depending on how much you’ve already got in savings.
Whatever you do, don’t let this rule of thumb intimidate you into inaction. Save whatever percentage of income you can, and aim to increase that rate a percentage point or two over time.
Ready to make some money for retirement?
If you’re feeling intimidated by the big-dollar figures we just batted around, remember: Once you escort your money into a retirement savings account, the real growth begins. The investments you choose in your retirement portfolio provide the fuel that makes your money multiply. To that end, click on to our next article and let’s look at two easy ways to create you investment portfolio for retirement.