Well over half of adult Americans—56 percent, to be precise—are unsure how much they should save for retirement.1 That’s a big challenge. Since it takes time to grow a large enough nest egg to retire comfortably, it’s hard to catch up once you’ve fallen behind—and knowing how much you should save is a key starting point!
Experts offer several different ways to think about this question of how much you should put in your 401(k), Individual Retirement Arrangement (IRA), or other retirement savings.
Setting a Goal: How Much Retirement Savings Do I Need?
Most experts say you should aim for retirement income equal to about 75 percent of your annual pre-tax salary just before you retire. That 75 percent should come from both your savings and what you expect to receive from Social Security.
Let’s apply those guidelines to a 66-year-old who earns $50,000 a year and retires at the end of 2019: he or she would be looking for a retirement income of approximately $37,500, which is 75 percent of $50,000. Social Security would provide $16,800 of that, according to the agency’s online Benefits Calculator. If you follow financial advisors’ traditional “4 percent rule,” which states that a retiree can withdraw 4 percent of their retirement savings every year without too much risk of running out of money, that 66-year-old would need $517,500 in retirement savings when he or she retires.2 That’s because 4 percent of that amount is $20,7000, which, when combined with the Social Security payments, totals up to the expected $37,500 in annual retirement income.
But that example is of someone who is just about to retire. What if you’re much younger? If you’re only 25 years old and earning a $50,000 annual salary, the amount you need to save for retirement is considerably more: $1.6 million.3 This takes into account the amount your income is likely to rise before you reach 67, which is full retirement age for those born in 1960 or later. Of course, you’ll have a bit more than 40 years in which to save.
Reaching Your Goal: Follow the ‘15 Percent Rule’
Setting a goal is a great first step, but how do you know how much to save for retirement, each year, when you’re in your 20s, 30s, or 40s? Don’t panic—financial advisors have a rule for that, too: the “15 percent rule.” Some financial advisors say saving at least 15 percent of your pre-tax income is the smart way to go. This assumes that you begin saving for retirement at age 25 and continue each year until age 67. If you’re starting later or have missed a year or two, you may need to compensate by saving more in some years.
Where does this 15 percent figure come from? It’s the simple result of a lot of complex analysis and math that aims to help you save enough for retirement over the course of your entire working lifetime. In general, the idea is that by saving 15 percent of your income every year, you’ll have saved enough so that, when you retire, you can withdraw that 4 percent every year to supplement Social Security and help you maintain your lifestyle. Saving 15 percent a year between the ages of 25 and 67 should get you to the amount that you need.4
Tracking Your Progress: Benchmark Your Retirement Savings Progress by Age
To help you know if you’re on the right track, some financial advisors suggest calculating how much you should have saved up for retirement at different ages. To come up with a dollar value, financial planners suggest thinking of your retirement savings in terms of your annual salary. By these benchmarks, at age 30 your retirement savings should equal at least 50 percent of your annual salary. As you get older, the multiple rises as follows:5
- By age 40, you should have saved two times your annual salary for retirement.
- By 50, you should have four times your annual salary.
- By 60, six times.
- By 67, you should have reached your end goal of around eight times your annual salary.
How to ‘Catch-Up’ Your Retirement Savings
As the research shows, many Americans haven’t saved enough money for retirement and likely need to make up for lost time. According to a recent study, more than one in five Americans (22 percent) have less than $5,000 saved for retirement and 15 percent have no retirement savings at all.6
If you fall into one of these categories, these guidelines may no longer apply. Experts advise putting aside as much of your salary as you possibly can to get back on track. But the most important thing, they say, is not to give up. While difficult, you can still regain at least some of the ground you have lost by trimming your expenses and then saving as much as you can. This may also help you to take advantage of additional savings opportunities that are available to you—such as employer matching contributions to your retirement savings plan at work, or “catch-up” contributions to your 401(k) or IRA. Catch-up contributions are amounts over-and-above the normal maximum annual contribution that the IRS allows you to deduct from your income for tax purposes. You’re eligible to make catch-up contributions once you reach age 50.