It’s a question many of us grapple with: How much money do I need to save for retirement?
The answer is not necessarily straightforward. It’s based on many variables unique to your circumstances, financial goals, and retirement dreams. And retirement experts also offer a few different rules of thumb when it comes to guidance on this all-important question.
Some experts suggest aiming for 80 percent to 90 percent of your gross pre-retirement income with your retirement savings efforts. Others recommend targeting 12 times your pre-retirement salary.
So, what’s the right goal for you? Here are some of the questions to consider and best practices for determining how much you need to have saved for retirement.
The most common rules of thumb
One of the most commonly referenced pieces of advice regarding retirement preparation efforts is that you should save 10 percent to 15 percent of your income annually. But what does that mean in terms of how much you should ultimately have amassed by the time you reach the finish line? Here’s a closer look.
80% Rule
The 80 to 90 percent rule of thumb is one that’s often cited. This guidance suggests having enough money during retirement to replace 80 percent of your gross pre-retirement income annually is a good idea. Though there’s some flexibility on this front, some experts suggest 70 percent is a good goal, while others advise aiming for 90 percent.
This rule is based on the fact that you’ll no longer be paying such things as payroll taxes toward Social Security once you retire, and you will no longer be contributing to a retirement account. Therefore, about 80 percent of your gross pre-retirement income should be enough to get by.
Importantly, that 80 percent goal can come from various sources—such as your retirement fund withdrawals, Social Security distributions, pensions (if you’re eligible to receive one), and any other sources of income you anticipate having. Meaning your retirement fund does not need to account for the entirety of that 80 percent benchmark. But more on that later.
10 to 12 times your pre-retirement salary
Yet another school of thought on retirement savings goals holds that you should have 10 to 12 times your annual income squirreled away by the time retirement day arrives. In other words, if you plan to retire at 61 years old (which is the average reported retirement age, according to a 2022 Gallup poll), and your income at that point is $100,000 annually, then you should have between $1 million and $1.2 million set aside for retirement.
Using your final work year income to calculate this figure can be helpful, as it will allow you to estimate your needs based on your most recent standard of living. Like the 80 percent rule, this amount can be adjusted higher or lower based on your other anticipated sources of income.
Questions to consider
In conjunction with the questions outlined below, you’ll also want to consider life expectancy as you work to determine how much money you should save for retirement. In the United States, average life expectancy as of 2021 is 76.4 years, according to the Centers for Disease Control. Though for women, it is longer at 79 years old versus 73.2 years old for men. Many people tend to underestimate their life expectancy, however. A 2017 study from the World Economic Forum indicated that babies born in that year are expected to live to age 100. What’s more, many rules of thumb were developed with shorter lifespans in mind. Overall, it’s best to be financially prepared to exceed the average life expectancy to ensure you have adequate financial resources available.
Here are some of the other factors to consider.
How much do you anticipate spending annually during retirement?
Ask yourself this: how much do you live on annually right now? And what about your current lifestyle might change during retirement? In other words, will you have the same expenses during retirement, or will your costs decrease? Or increase?
Will you have a mortgage in retirement and other ongoing debt payments? Do you intend to downsize? Or travel more?
Answering these questions can help you arrive at an annual income figure you’ll need during retirement. And as you consider your anticipated annual spending during retirement, it’s important to include all of your potential expenses (housing, food, healthcare, clothing, transportation, travel and entertainment) in order to create a reasonable ballpark estimate of your financial needs.
What will your income sources be during retirement?
Yet another critical factor to assess as you gauge retirement savings requirements is your various potential sources of income. If you will have multiple streams of income, you may not need to save quite as much in a retirement account.
Social Security payments, for instance, will likely make up part of your retirement income. As of 2023, about 67 million Americans will receive monthly Social Security benefits, according to data from the Social Security Administration. What’s more, these benefits make up as much as 30 percent of each recipient’s overall income. Want to know how much Social Security income you can expect during retirement? Visit the Social Security Administration website to obtain your projected Social Security benefits statement online here.
Pension plans are another source of potential income for many retirees. This, too, should be factored into retirement savings goals as well if you’re going to receive pension benefits. Though far fewer Americans have pension plans these days. According to the United States Department of Labor, there were 46,577 defined benefit pension plans as of 2020, a figure that’s a steep decline from the height of such programs in 1983, when there were more than 175,000.
Other potential sources of income may include investments made outside of retirement plans, as well as real estate holdings that may provide passive rental income, and working during retirement, which we’ll cover next.
Do you intend to work during retirement?
For many people, saying goodbye to a full-time day job and retiring doesn’t necessarily mean the end of their working years.
Often, the first few years after officially retiring will include some type of part-time work, consulting, or continuing a side hustle. In fact, more than half of Americans (57 percent) say they plan to keep working after retiring, and 36 percent say they plan to work part-time, according to 2022 data from the Transamerica Center for Retirement Studies.
Having this sort of income can ease the burden on your retirement savings withdrawals and overall needs, making it important to seriously consider whether you plan to fully walk away from the workforce once you officially retire.
Will you have enough?
Even after sorting through all of these questions and considerations, you may still wonder: Will I have enough? The good news is there are retirement calculators available online that can help answer that question with a greater degree of specificity. These calculators are designed to help assess where you currently stand and what you should be aiming for.
By entering information like your current age, intended retirement age, current retirement savings and a few other variables, retirement calculators like the one from smartasset.com tell you how much you can expect to have at retirement based on your current savings rate, and how much you would likely need to have based on your current salary.
Of course, if you are unsure about how to answer some of the questions covered here, or if your situation is more complex, it might be a good idea to work with a financial advisor who can help you establish a well-developed plan, one that helps ensure you are indeed prepared when retirement finally arrives. And even the best-laid plans should be revisited regularly, perhaps once each year, to ensure that you’re still on track and adjust for any changes you may have in your goals and life plans.
No matter where you are in your retirement journey, you too can have a 401k plan. Get started today with a free, no-obligation consultation with a 401(k) retirement specialist.
Penelope Team
Mia Taylor