How Much Should You Save for Retirement?

Written by Melanie Lockert

When you think of retirement, do you dream of slow, lazy days doing whatever you want? Or do you fear not having enough and that a diet of cat food might be in your future? Whatever the case may be, I’m sure you’d like to enjoy your retirement and feel secure in your finances. But for many of us, retirement is decades away.

It can be tough to plan for something so far away — something that we can’t see and is seemingly out of reach. However, with any long road, we reach our destination eventually. So, it’s better to start planning now! You may wonder “How much should I save for retirement?”. While there is no cookie cutter answer, we’ll guide you toward some benchmarks.

Ask these questions first

How much you should save for retirement should not be an arbitrary number. What I need to save for retirement may not be what you need to save for retirement. Everyone is different and there are a multitude of factors to consider. Before you move ahead, answer these questions first:

  • How much do I already have saved?
  • When do I want to retire?
  • Where do I want to retire and what is the cost of living? (this is a big one!)
  • What assistance may I receive aside from my own retirement savings? (Social Security, pension, etc.)
  • Do I have medical issues that need to be considered during retirement?
  • What can I expect regarding life expectancy? (this is tough but look at family history, health issues, etc.)
  • Am I saving for anyone else? (such as a non-working spouse)
  • What retirement vehicles am I currently investing in? (401(k), Traditional IRA, etc.)
  • What is my risk tolerance?

Being able to answer these questions accurately can help you come up with a more accurate number. Someone who plans to retire in California will have a different number than someone who will retire in Nebraska. The same goes for someone that is healthy compared to someone with a known medical condition that will cost money in the future. You want to be as specific as possible and look at retirement savings within the context of how you live and what you want out of your retirement.

Look at your income and expenses

If you want a retirement number based on the context of how you live first look at your income and expenses. How much money are you earning after taxes? What are your current expenses? Are you happy with your current lifestyle or do you anticipate having a more expensive or more affordable lifestyle in retirement? You may need to save 10 to 12 times your annual salary.

If that number freaks you out, first see if there are places you can cut back without hurting your lifestyle too much. The fact is the less you need to live off of, the less you need to save.

Rules of thumb for saving for retirement

Save for retirementAccording to Fidelity, you should save 15 percent of your pre-tax income every year. This can be a good general rule of thumb but it’s obviously not going to work for everyone. If you’re closer to retirement with little saved up, you’ll want to save more than that.

Another rule of thumb that you may have heard is to save a million dollars for retirement. That number can seem astronomical but remember you’re not doing this all on your own. You’re utilizing the power of compound interest over many decades. If you’re lucky, hopefully your employer is contributing on your behalf as well.

But once again, while saving 15 percent of your income or saving a million dollars are good benchmarks, they are just that — benchmarks. They may not be the exact destination for you, but a good place to work toward. You may need to save more than that based on your lifestyle, your cost of living, etc.

Tips to save for retirement

Retirement is a huge milestone in your life and will require a lot of planning. But it doesn’t have to be too stressful to start! In order to reach any big goal, you want to start now and stay consistent. That means always putting something away. If you can’t put away 15 percent, don’t think you’ve ruined your shot and give up. Put away what you can, even if it’s only one percent. If you can afford to do more, save more now to live on later.

You’ll also want to regularly check in with your risk tolerance as well as your retirement vehicles. For example, some of your money may be held in the stock market. Over the long-term, this can help beat inflation and help you build your nest egg. Of course investing comes with risk so you want to be mindful of your strategy.

You want to regularly check in with your risk tolerance because investing comes with risk.

Your risk tolerance can help dictate your investing strategy but it’s not a one and done type of thing. Your risk tolerance will change over your life, especially with big events like marriage, divorce, having kids, or buying a house. All of these big life events can change your risk tolerance and as such you want to change your investing strategy.

Another thing to consider is taxes. Do you want to pay taxes now or do you want to pay taxes later, in retirement? That can help you decide if you want to use a Roth IRA or a Traditional IRA.

For any brokerages you are investing in, be mindful of the fees! Your nest egg can take a hit with fees, so do your research.

Lastly, do your best to not touch your retirement savings at all. If you do, there may be financial consequences and penalties. Not only that, you’re essentially robbing your future. Keep saving for retirement and have your future self thank you.

Final word

How much you need to save for retirement is based on a variety of factors. While there are good benchmarks to guide you, you’ll want to look at the big picture and understand the context so you can save the right amount for you.