How Much Money Do I Need for Retirement?

Find Your Target Retirement Savings Goal

A couple looks at photos on a digital camera.
•••

Fotokia / Getty Images

The sooner you begin planning for retirement, the more likely you will be to reach your retirement goals. One major challenge is figuring out how much you need to save for the future so you can fund your living expenses for the lifestyle you want to live.

You can take several approaches in deciding how much to save for retirement. Determining the right number means honestly assessing your current and future income, and identifying your ideal retirement lifestyle, along with its associated costs.

Key Takeaways

  • Having a target amount for your retirement savings can make it easier to budget.
  • Many people aim to set aside a minimum of 15% of their income for retirement.
  • Consider how inflation might erode your purchasing power over time.

Why You Need a Retirement Target

Establishing a clear retirement savings goal can help you stay in financial health during your retirement years. One in three Americans say they feel “very confident” about having enough money to last through their retirement years, according to the 2022 Retirement Confidence Survey by EBRI.

"Setting a target for saving for retirement helps motivate you, forces you to stay on track, and helps you prioritize your spending," Danielle Miura, certified financial planner (CFP) and founder of Spark Financials, told The Balance in an email.

When you have a savings target in mind, you can work backward to break that large goal into smaller goals that fit your timeline. For example, if you're 30 and you'd like to save $1.5 million by age 65 for retirement, you could calculate how much you'd need to save annually to reach your goal. You then could calculate what you'd need to save monthly.

Working in smaller increments to save can make a larger retirement goal seem less overwhelming. Setting a goal can also help you visualize where you'd like to end up in retirement, Miura said. Once you do that, it becomes easier to align your goals with your actions.

Once you set a savings goal, review it annually to ensure your goal is still appropriate for your financial situation. Remember to consider potential costs for long-term care in your later years.

Figuring Out How Much You Need To Retire

Everyone will have a different target amount to save for retirement and different budgeting strategies based on their lifestyle goals, income, and personal financial situations. Three common strategies to save for your goal include the 15% rule, the 80% rule, and the “10 times your salary” rule.

The 15% Savings Rule

The 15% savings rule for retirement dictates that you consistently save 15% of your income. The younger you begin this strategy, the more time you have to benefit from the power of compounding interest on any investments.

For example, you're 25 years old and making $40,000 a year. If you save 15% of that, or $6,000 per year, you’d have $240,000 by the time you are 65. If you invested the funds, say through an IRA or 401(k), and earned an average of 7% annual rate of return, you'd have $1.2 million saved by age 65.

This example assumes your income never changes. If your income increased over time, you would save more than $6,000 a year. For example, if you earned $100,000 per year at age 35, you'd then save $15,000 a year, or 15%.

There are two potential downsides with the 15% rule. First, this rule assumes you can afford to set aside 15% of your pay for saving or investing. That may not be realistic if you're just starting out in your career and earning a lower income or you're paying off debt. You may only be able to save 10% or even 5% of your income instead.

Next, the 15% rule doesn't account for inflation, which can affect both your ability to save now and your purchasing power in the future. With higher inflation, many people may not be able to afford to budget 15% of their income toward retirement, Muira said. Conversely, the more inflation rises, the more you might need to save to make up for price increases once you reach retirement age.

The U.S. inflation rate as measured by the Consumer Price Index (CPI) reached 8.6% year-over-year as of May 2022. If your investments earned less than 8.6%, your money would have lost buying power over that year.

The 80% of Income Rule

The 80% rule for retirement focuses on how much of your current income you'll need to live on instead of what percentage of your income to save. It dictates saving enough to replace 80% of your income in retirement years.

If you make $100,000 a year, you'd aim to save enough to provide you with 80% of that, or $80,000, per year in retirement. So, you’ll need to estimate your expected length of retirement. How much you will truly need will depend on many factors, including the expenses for your expected lifestyle.

10 Times Your Salary

Another commonly used rule of thumb for retirement is to save 10 times your salary by the time you plan to retire. To calculate your target retirement amount, simply multiply your annual by 10. So if you make $100,000 a year, aim to save $1 million.

Depending on when you plan to retire, expected spending, and inflationary changes, saving 10 times your income may be enough. On the other hand, you might need to save 12 or even 15 times your income, especially if you'd like to retire before age 65.

You can use a retirement calculator to determine how much you may need to save based on the 15% rule, the 80% rule, or the “10 times your salary” rule.

Find the Target That Fits Your Goals

Everyone's needs and goals are different, and the savings rule you apply can depend largely on your vision for your retirement.

Miura suggested asking some specific questions that can help you decide which strategy may be right for you:

  • What do you want your retirement to look like?
  • What will your primary and secondary income sources be in retirement (i.e., 401(k) savings, IRAs, taxable accounts, pensions, Social Security)?
  • How much do you anticipate paying in taxes in retirement?
  • How much do you anticipate paying for medical care and where will the money for those expenses come from (Medicare, Medicaid, long-term care insurance)?

Those questions can help you shape your estimated retirement budget. "The key to deciding how much to save for retirement is deciding how much you want to spend during retirement," Miura said.

Frequently Asked Questions (FAQs)

What is the average retirement savings?

Checking the average retirement savings statistics can give you a baseline to measure your savings progress. The median household retirement savings was $93,000 as of late 2020, according to a Transamerica Institute survey. Full-time workers had a median of $104,000 saved for retirement versus $48,000 for part-time workers.

How can I catch up on my retirement savings?

If your retirement savings plan gets derailed, you can take a few steps to try to get back on track toward achieving your goal. First, you could increase your contributions. Even a 1% to 2% increase in your contribution rate annually could make a significant difference to your retirement savings, especially if you are investing. You can take advantage of catch-up contributions to save more money in your 401(k) or IRA once you reach age 50.

What happens if I have no retirement savings?

If you have no retirement savings at retirement, you will have to depend on other sources of income, such as Social Security. You may have to consider extending your working years. If you are still in your working years, you may want to prioritize finding opportunities to save, such as taking advantage of a tax-advantaged savings plan like a 401(k) or IRA.

Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!

Article Sources