How Much Do You (Really) Need to Save for Retirement?

How Much Do You (Really) Need to Save for Retirement?

It’s not about money, it’s about income

One important point when it comes to determining your retirement “number” is that it isn’t about deciding on a certain amount of savings. For example, the most common retirement goal among Americans is a $1 million nest egg. But this is faulty logic.

Image source: Getty Images.

Image source: Getty Images.

The most important factor in determining how much you need to retire is whether you’ll have enough money to create the income you need to support your desired quality of life after you retire. Will a $1 million savings balance allow you to create enough income forever? Maybe, but maybe not. That’s what we’re going to determine in this article.

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Retirement Savings by Age

Knowing how much you should save toward retirement at each stage of your life helps you answer that all-important question: “How much do I need to retire?” Here are a few useful formulas that can help you set age-based savings goals on the road to retirement.

Percentage of Your Salary

To begin to figure out how much you need to accumulate at various stages of your life, it can be useful to think in terms of saving a percentage of your salary.

Fidelity Investments suggests saving 15% of your gross salary starting in your 20s and lasting throughout the course of your working life. This includes savings across different retirement accounts and any employer contributions if you have access to a 401(k) or another employer-sponsored plan.

How Much to Save for Retirement by Age

Fidelity also recommends the following benchmarks—based on a multiple of your annual earnings—for how much you should have saved for retirement by the time you reach the following ages:

Target Retirement Savings by Age  Age  Annual Salary  30  1x annual salary  40  3x annual salary  50  6x annual salary  60  8x annual salary  67  10x annual salary Source: Fidelity

An Alternative Formula

Another, more heuristic formula holds that you should save 25% of your gross salary each year, starting in your 20s. The 25% savings figure may sound daunting. But don’t forget that it includes not only 401(k) holdings and matching contributions from your employer, but also other types of retirement savings.

If you follow this formula, it should allow you to accumulate your full annual salary by age 30. Continuing at the same average savings rate should yield the following:

  • Age 35—two times annual salary
  • Age 40—three times annual salary
  • Age 45—four times annual salary
  • Age 50—five times annual salary
  • Age 55—six times annual salary
  • Age 60—seven times annual salary
  • Age 65—eight times annual salary

Whether or not you try to follow the 15% or the 25% savings guideline, chances are your actual ability to save will be affected by life events such as the job loss many experienced during the COVID-19 pandemic.

1. Calculate what your savings will cover when you’re retired

Understanding what you expect retirement to look like will help determine how much you’ll need in order to fund that lifestyle. If you plan to travel the world in luxury, your budget will be a bit different than someone who just wants to birdwatch from the backyard each morning.

In retirement, your savings will cover many of the same expenses that you had prior to retirement. These include, to name a few: 

  • Food
  • Shelter
  • Transportation
  • Clothing
  • Gifts
  • Utilities
  • Insurance (including a health plan)
  • Travel

If you don’t plan for any of these categories to change much from pre- to post-retirement, then you should have a good idea of your budget. However, if you have big plans for your retirement years, it’ll be important to determine how much your new standard of living will cost.

Also be sure to account for unexpected expenses that could come up, such as medical care for you and your spouse, or even helping a child or grandchild financially.

“The most common expense that a retiree can ignore (or forget to budget for) is end-of-life expectancy expenses,” says Jim Ludwick, a certified financial planner, author, and founder of MainStreet Financial Planning, Inc. “This includes caregivers coming to your house, going into assisted living, or skilled nursing. Those are very expensive parts of people’s lives. And a lot of times that can eat up quite a bit of savings, if it goes on for an extended period of time.”

Next, consider where you plan to live. You may want to downsize, or you might plan to buy your dream retirement home. Either way, be sure to factor in all those costs.

Don’t forget to consider inflation and the impact this will have on your savings. For instance, in 2021 alone there have been inflation rates exceeding 6%, the highest in decades. While this is well above average, you should account for inflation of approximately 2% per year.

Conclusion

Request a quote to determine how much you need to retire. The sooner you start planning, the easier it will be to achieve the retirement you desire. An annuity is the only retirement plan that can provide you with a fixed income for life on a guaranteed basis, so don’t wait any longer. Act now, and let us help you secure your financial future.

Planning and Investments

Whether you choose to work with an advisor and develop a financial strategy or invest online, J.P. Morgan offers insights, expertise and tools to help you reach your goals.

About the Author

Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and People.com. Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert. 

Social Security, pensions, and other reliable income sources

The good news is that, if you’re like most people, you’ll get some help from sources other than your savings, such as your Social Security benefits. For most people, Social Security is a significant income source.

But the percentage of income that Social Security will replace is typically lower for higher-income retirees. For example, Fidelity estimates that someone earning $50,000 a year can expect Social Security to replace 35% of their income. But someone earning $300,000 a year would have a Social Security income replacement rate of just 11% on average. 

If you aren’t sure how much you can expect, check your latest Social Security statement, or create a my Social Security account to get a good estimate based on your work history.

If you have any pensions from current or former jobs, be sure to take those into consideration. The same goes for any other predictable and permanent sources of income — for example, if you bought an annuity that kicks in after you retire.

Continuing our example of a couple that needs $8,000 in monthly income to retire, let’s say each spouse is expecting $1,500 per month from Social Security, and that one spouse also has a $1,000 monthly pension. This means that, of the $8,000 in monthly income needs, $4,000 is being taken care of by sources other than savings.

So, in summary, you can estimate the monthly retirement income you need to generate using this formula:

Monthly income required = Estimated monthly retirement expenses-Monthly retirement income from other sources

How Much Money Do I Need To Retire At 55?

If your goal is to retire at age 55, Fidelity recommends that you save at least seven times your annual income. That means if your annual income is $70,000 a year, you need to save $490,000. But remember, this is only an estimate – it doesn’t consider your unique goals and other unknown variables, like future medical expenses and your life expectancy.

 

Also, keep in mind that there are benefits to waiting to retire. For example, those born between 1943 and 1954 can take 100% of any Social Security benefits you qualify for if you wait until your full retirement age at 66. And the longer you wait, the more the benefits increase – up to 132% if you’re 70 or older.

If you expect to receive a pension, waiting could increase the percentage of your salary you receive during retirement. The amount will likely depend on certain factors, like your years of service and income. You’ll have to contact your benefits department for specifics.

In addition, waiting until you’re 59½ to withdraw money from a Roth or Traditional Individual Retirement Account (IRA) will give you access to your funds without penalty.

Waiting also allows you to add more catch-up contributions – additional funds investors who are at least 50 years old can add to certain funds, including IRAs, 403(b)s and 401(k)s.

To estimate how much money you need to retire by a certain age, use our retirement calculator.

What Is the 4% Rule?

The 4% rule is a guideline used to determine how much a retiree can withdraw annually from a retirement account. It is intended to make retirement savings last for 30 years.

Starting Early

Let’s begin with a best case scenario: you’re 25, and you’ve only been working a few years before you decide to get smart about your retirement. You live in a mid-sized city, let’s say Tulsa, Oklahoma, where you earn $45,000 per year. You currently have $5,000 in your savings account, and by saving $100 per month you manage to put another $5,000 in your 401(k). Your employer has promised to match 100% of your contributions to the retirement savings account, up to 5% of your total income.

After thinking it over, you decide that you would be comfortable living a lifestyle similar to your current one in retirement. Assuming a rate of return on your investments around 4%, you would have to save about $176 per month from now until you turn 67 to retire comfortably. Not bad! If you continue on your current path, however, you’ll be over $260,000 short of your retirement goal when the time comes.

Getting an early start on retirement savings can m

Getting an early start on retirement savings can make a big difference in the long run. By saving an extra $76 per month, the 25-year-old in the example above can close the $265,261 shortfall projected by SmartAsset’s retirement calculator.

Retirement Planning

Whether you prefer to independently manage your retirement planning or work with an advisor to create a personalized strategy, we can help. Rollover your account from your previous employer and compare the benefits of Brokerage, Traditional IRA and Roth IRA accounts to decide which is right for you.

How Much Do I Need to Retire? (Step-By-Step)

  1. Calculate your monthly expenses when you will retire. (mortgage/rent, car payment, utilities, etc.)
  2. Calculate the guaranteed income that can be generated from all retirement accounts such as a 401(k) and IRA, separate from Social Security Income.
  3. If the guaranteed income does not fulfill your monthly expenses requirement, find out how much you need to save and which age Social Security will provide enough income to supplement the remaining monthly expense amount.
  4. Now you have a monthly paycheck covering your expenses as if you were still working with your current annual income.

1. When you plan to retire

The age you plan to retire can have a big impact on the amount you need to save, and your milestones along the way. The longer you can postpone retirement, the lower your savings factor can be. That’s because delaying gives your savings a longer time to grow, you’ll have fewer years in retirement, and your Social Security benefit will be higher.

Consider some hypothetical examples (see graphic). Max plans to delay retirement until age 70, so he will need to have saved 8x his final income to sustain his preretirement lifestyle. Amy wants to retire at age 67, so she will need to have saved 10x her preretirement income. John plans to retire at age 65, so he would need to have saved at least 12x his preretirement income.

Of course, you can’t always choose when you retire—health and job availability may be out of your control. But one thing is clear: Working longer will make it easier to reach your savings goals.

3. Consider other sources of income while retired

There are multiple savings vehicles and income streams to consider for retirement. These can affect how much you need to save today, depending on which sources of income are available to you.

Social Security benefits are offered to retirees aged 62 or older (or those who become disabled or blind), who have earned enough credits throughout their career in order to qualify for the program. This can provide a steady income stream in retirement. For example, someone born in 1970 who earns $60,000 per year can retire at age 67 with $1,999.00 in monthly Social Security benefits. That’s nearly $24,000 per year that your retirement savings will not need to cover.

A pension plan can also provide you with a steady, monthly income stream. If your employer has one, you’ll need to ask if you qualify, how much income this will offer, and what the pension requirements are.

Annuities are another retirement income source to consider. They’re offered by insurance companies and act as a long-term investment vehicle. After purchasing an annuity — either with a lump sum or periodic purchase payments — you will receive regular payments over the course of your retirement.

A 401(k) is one of the most popular retirement savings options. These employer-sponsored investment vehicles allow you to save and invest as much as $20,500 per year (in 2022) — or as much as $27,000, if you’re over the age of 50 — toward your retirement.  The money in a 401(k) can be invested in a variety of different securities, and your contributions may even be matched by your employer, amplifying your efforts. Funds can be distributed without penalty beginning at age 59 ½, or earlier with certain exceptions.

An IRA, or individual retirement account, can be opened at any number of financial institutions, including banks, credit unions , and brokerages. There are two primary types: the traditional IRA and a Roth IRA. Each offers its own tax advantages, depending on your specific situation. For 2022, individuals can contribute up to $6,000 into an IRA annually, which can be invested in various securities and even real estate. If you’re over 50, you can put up to $7,000 into an IRA each year.

There are other plans and investment options available, but these five are the most common among retirees.

Keep in mind all of the income sources that can help cover your expenses

As you explore how much money you might really need in retirement, remember that the amount you decide to save and invest on your own is only one component of your future retirement income.Most Americans will have Social Security as the backbone of their retirement savings. (Even if benefit payments are reduced in the future, Social Security is not likely to go away.) And don’t forget about other sources of income that may be available to you many years from now, including the money in your workplace and personal retirement accounts, pensions, annuities, proceeds from selling your home or business, rental income or an inheritance.

The Best Laid Plans

In the above scenarios, our hypothetical subjects kept their savings in one of a variety of retirement savings options, in either a savings account, a 401(k) or a traditional IRA. There are many ways you can invest the money you set aside for retirement, depending on your goals. The rate of return your money earns depends on the risk you are willing to take on, the success of your particular investment strategy and, to a certain extent, luck. For example, an economic downturn can hurt your investments, at least in the short run. So too can changes in the inflation rate, and other economic events.

All of which is to say: the unexpected can happen, and often does. The best you can do is to develop a solid plan based on the information you have now. Don’t let retirement savings statistics get you down. A retirement calculator can help you see how you are doing so far and what you need to change to make your retirement goals. By setting goals and meeting them, you give yourself the opportunity for a rich and rewarding retirement.

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