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Saving for Retirement: How Much Is Enough?

Key Points
  • Retirement is expensive. Depending on where you live and your lifestyle, you may need up to $1 million or more. The challenge is how to get there.

  • Saving 10 percent of your annual salary in your 20s—and continuing to save—is a good place to start. Start later and the percentages go up dramatically.

  • Saving and investing in a tax-advantaged retirement account is the best way to reach your goal.

Dear Carrie,

I just turned 30 and know that I need to get serious about saving, even for retirement. How much should I be setting aside?

—A Reader

Dear Reader,

It's interesting that you say "even for retirement," because to me, no matter how old you are, retirement should likely be one of your top savings goals. Yes, it's hard to think that way when you're young, and the amount you need can be shocking. But when you really start to crunch the numbers, the truth is that you may need more than you think.

The precise amount will depend on where you live and your lifestyle. But an interesting analysis by GoBankingRates that looked at the cost of living in every state estimated that you could need from just under a million to more than $2 million.

The reality, of course, is that a lot of people will have far less. According to a recent Employee Benefits Research Institute (EBRI) study, nearly 43 percent of American households are projected to run short on retirement savings. But whatever study you look at, the point is clear: It's important to save—especially for retirement. And I totally agree.

Start with these general guidelines

You'll hear a lot of savings guidelines tossed about. Some suggest, for instance, that you’ll be on the right track if you’re able to build up savings equal to your annual salary in your 30s, three times that amount in your 40s, and up from there. Movements like FIRE (Financial Independence Retire Early), focus on living way below your means and saving much more (up to 50 percent— seriously!).

When you first think about saving that much, the goal can feel overwhelming. But to me, it doesn't have to be that complex. It's really about starting to save early and then saving consistently. Here are some guidelines that I think are pretty realistic:

  • If you start in your 20s, save 10 percent of your pre-tax income.
  • If you start in your 30s, save 15-20 percent.
  • If you're in your 40s, you'll need to save 30 percent. (Yes, that's a lot.)
  • After that, the percentages go up even higher. Someone over 50 just starting to save should aim to set aside about 40 percent of pre-tax income. 

The positive side of the guidelines

There is a plus to these guidelines (especially if you're young): If you're 30 and can save 15-20 percent of your income for retirement, you probably won't need to increase that percentage as you age. Starting early is a huge advantage, provided you remain consistent throughout your working life.

Don’t get me wrong. I understand that socking away that much in your 30s is tough, especially when you’re trying to pay off student loans or manage other financial obligations like a house or kids. But the numbers don't lie—retirement is a hugely expensive challenge, and the earlier you start preparing for it, the better.

Why you need that much

Predicting how much you'll need in retirement isn’t an exact science for sure, and it will depend on a number of personal factors. But in order to be confident that your money will last through a 30-year retirement, a common rule of thumb is that you'll need a portfolio roughly 25 times what you want to withdraw in your first year of retirement, provided you have a well-diversified portfolio. In other words, a million dollar portfolio can produce an annual income of approximately $40,000 ($40,000 times 25 equals $1 million) for 30 years.

Will $40,000 a year cut it for retirement? You'll most likely have other sources of income such as Social Security, but chances are your savings will have to cover a fairly large percentage of your living expenses. If you're still skeptical, play with some scenarios on an online retirement calculator. You can then set a retirement goal and see in real numbers how much you should save each month to meet it.

Make it easier with a tax-advantaged account

You can help pave the way by saving in a tax-deductible retirement account. If you participate in a 401(k) and get a company match, so much the better. If you don't have a 401(k), open an IRA and set up automatic payments to contribute up to the max (currently, $5,500 with a $1,000 catch-up for those 50 and over). Having an automatic deduction from your paycheck will make it easier to save. And chances are you'll quickly adjust to the change in your take-home pay.

The tax savings make it even sweeter. Pre-tax contributions to a traditional 401(k) or an IRA can lower your taxable income now. Alternatively, you can channel your savings into a Roth 401(k) or Roth IRA, and get the tax savings when you make withdrawals down the road. Either way, your savings can grow tax-free.

Start investing now

Finally, understand that "saving" is different than investing. You can’t afford to take risks when you’re saving for a short-term goal. But when you’re striving to meet a goal that's five or more years in the future (and at your age, retirement is most likely 35 years away), be sure to take advantage of the growth potential of the stock market. A broad-based stock mutual fund or exchange traded fund is a good way to get started.

You're already a step ahead by thinking about retirement. Now take action. Your age is still on your side if you get going right away!



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