How Much Should I Be Saving for Retirement?
When it comes to saving for retirement, experts recommend saving 10% to 15% of your income every month, but you can calculate a more personalized goal by following four simple steps.
As a rule of thumb, most experts recommend an annual retirement savings goal of 10% to 15% of your pretax income. High earners generally want to hit the top of that range; low earners are able to typically hover closer to the bottom since Social Security will usually replace more of their income. But rules of thumb aren’t absolute, and how much you should save for retirement depends on both your present and future, both the known and unknown parts, such as your:
- Life expectancy
- Current spending and saving levels
- Lifestyle preferences in retirement
Here are the four steps you should take to figure out how much to save for retirement:
1. Estimate your future income needs
This step is by far the most tedious, but once you get through it, the others are a breeze. Also, if you keep a budget or track your spending in any way, shape, or form, you’re already ahead of the game. Figuring out how much income you will need in retirement requires analysis of how much money you are spending now.
If you’re not already doing that, enter your typical monthly expenses in the first column of a spreadsheet or jot them on a piece of paper. Then do a little thinking about whether each expense will stay the same, go down, go up, or disappear in retirement. In a second column, write your best guess of what each expense will be during that time.
Add your expenses together and tack on those extra expenses that you know you’re going to want later such as travel, golf, mahjong supplies, ballroom dance lessons, etc. This will give you an idea of how much you plan to spend each month in retirement. Multiply by 12 to figure out how much you plan on spending in a year. Compare that to your current income to arrive at what’s called a replacement ratio. This is a fancy way of saying how much income you should aim to be saving in retirement.
2. Consider rules of thumb
According to the Employee Benefit Research Institute’s retirement confidence survey, less than half of workers have actually tried to calculate how much they need to save before they retire. That means at least 50% of you are not going to do the exercise outlined in step 1. (If you did complete step 1 and got a ratio in the 70% to 90% range, congrats — you probably can skip to step 3.)
If you’re among the 50% who won’t do the exercise, this is the point to fall back on income-replacement rules of thumb. They’re not as accurate because they’re a one-size-fits-all solution to a problem that comes in many shapes and sizes. But they’re far better than nothing.
The one used most often is the 80% rule, which says you should aim to replace 80% of your pre retirement income. This is a loose rule: Some people suggest skewing toward 70%; some think it’s better to aim for a more conservative 90%.
To figure out where you land, consider what percentage of your income you’re saving for retirement. You’ll no longer have to do that once you cross the hypothetical finish line, which means if you’re saving 15% now, you could easily live on 85% of your income without adjusting expenses. Add in Social Security, cut payroll taxes — which eat 7.65% of your income while you’re working — and you can probably adjust that income down even further.
The best way to use a rule of thumb like this is as a gut check against the more tailored approach of taking a deep dive into your expenses. Are you way off the standard advice or pretty close? But it can also be used as a starting point of its own, from where you can wiggle the numbers.
3. Use a retirement savings calculator
If your estimates are correct, a good retirement calculator will give you an assessment of how much you should be saving for retirement, by combining those annual spending estimates with projections. Most thorough calculators bake in assumptions that are based on research: There will be defaults for inflation projections, life expectancy and market returns.
To get the most accurate result, you should consider whether those assumptions are correct given your situation. Is your investment strategy poised to hit the default return used by a calculator, which will probably hover around 6% or 7%? If you’re skewing toward bonds, you’re going to want to adjust that down. Did your grandmother and your grandmother’s grandmother live to 110? You’ve got good — but expensive — genes. Take those extra years you may live into account in your projections.
4. Revisit regularly
Life changes and your retirement needs will change with it. Whether it’s a new job, a new baby or a new passion to travel the world once you hit 60, it makes sense to perform these retirement calculations fairly often. It’s always better to adjust as you go, rather than struggle to catch up down the road. In the worst case scenario you could retire and realize you didn’t save enough to do the things you love.
If you feel overwhelmed, it’s easy to get help with balancing your financial goals. I highly recommend that you find a financial advisor who is not only a fiduciary, but operates on a fee-only basis. Finding a financial advisor with these qualifications eliminates conflicts of interest, and makes sure that you are getting the best service possible.