How Much of My Income Should I Save for Retirement?

Retirement planning is one of the most important financial decisions you’ll ever make. Understanding how to reach your retirement goal requires an understanding of how much to save, what vehicles to save in through, and how to grow your savings. There is a lot of nuance in the world of retirement planning, however, let’s break down one of the most fundamental questions of how much income should we save together.

Why Retirement Savings Matter

Think of saving for retirement as a way to acquire your future independence. When you’re no longer working, you’ll still need income to maintain your lifestyle and cover essential expenses. Social Security benefits can help, but they’re usually not enough. In 2024, the average monthly Social Security benefit is about $1,905—far from sufficient for most people to live comfortably.

To keep your standard of living in retirement, experts generally suggest replacing 70% to 90% of your pre-retirement income. For example, if you earn $100,000 a year now, you’ll likely need $70,000 to $90,000 annually in retirement. This means your savings rate should align with that goal.

The 15% Rule: A Good Starting Point

A common recommendation is to save at least 15% of your pre-tax income for retirement with you begin your career as a young professional. As you get older, you should save more of your income to ensure you can live the life you want in retirement. Your retirement goals will dramatically influence how much we need to save today, therefore everyone’s saving plan will look different as we all rarely have the same goals. However, here is a general roadmap to get a better idea of what you should shoot to save:

In Your 20s

• Savings Rate: Aim for 15% of your income.
• Focus: Establish good financial habits and contribute to employer-sponsored retirement plans.
• Goal: Save the equivalent of your annual salary by age 30.
• Starting early gives your money decades to grow. Even modest contributions can snowball into significant savings over time.

In Your 30s

• Savings Rate: Increase to 15%-20% if possible.
• Focus: Balance retirement savings with other goals, like buying a home or starting a family.
• Goal: Accumulate 2-3 times your annual salary by age 40.
• Take full advantage of employer contributions and diversify your investments to stay on track.

In Your 40s & 50s

• Savings Rate: Aim for 20% or more if you’re behind.
• Focus: Maximize retirement accounts and refine your retirement plan.
• Goal: Save 6-8 times your annual salary by age 60.
• If you’re playing catch-up, consider maxing out retirement contributions and using catch-up provisions available for those over 50.

In Your 60s

• Savings Rate: Keep saving while preparing for retirement.
• Focus: Develop a retirement income strategy and decide when to claim Social Security.
• Goal: Have 8-10 times your annual salary saved by the time you retire.
• At this stage, preserving your wealth and ensuring it lasts through retirement become top priorities. Think through mitigating retirement risks like inflation, tax, health care, longevity, and lifestyle.

Tailoring Savings to Your Lifestyle

Your retirement savings rate depends on your unique lifestyle and goals. Here are three questions that will dramatically impact how much we’ll need to save today to get us where we want to go tomorrow.

How much monthly income do I want in retirement?

Do you dream of a quiet, modest retirement, or are you planning to travel the world? Your lifestyle choices will dictate how much income you’ll need in the future.

What specific age do I want to retire?

The average person in the US retires around the age of 63. Would you want to retire earlier or later than average?

What legacy do I want to leave?

Would you want to leave your kids, or grandkids, a lump of cash or real estate one day? How much would you like this to be?

Tackling Common Savings Challenges

Struggling to Save?

If saving 15%-20% feels overwhelming, start smaller. Even 5%-10% is better than nothing. Gradually increase your contributions over time, and automate your savings to make it easier.

Competing Financial Priorities?

It’s tough to save for retirement when you’re also paying off student loans or saving for a child’s education. Focus on paying off high-interest debt first while contributing enough to your retirement account to capture any employer match.

Starting Late?

If you’re getting a late start, don’t panic. Increase your savings rate, make catch-up contributions, and consider delaying retirement to give your money more time to grow.

Make the Most of Tax-Advantaged Accounts

Using tax-advantaged accounts can turbocharge your savings. Here are some common options:

401(k) or 403(b)

• Employer-sponsored plans that grow tax-deferred.
• Contribution limit in 2024: $23,000 ($30,500 for those 50+).

Individual Retirement Accounts (IRAs)

• Traditional IRAs offer tax-deferred growth; Roth IRAs provide tax-free growth.
• Contribution limit in 2024: $7,000 ($8,000 for those 50+).

Health Savings Accounts (HSAs)

• Triple tax benefits: contributions, growth, and withdrawals for healthcare expenses are tax-free.
• HSAs can double as a supplemental retirement account.

The Magic of Compound Interest

Starting early and saving consistently unlocks the full potential of compound interest. For instance, saving $500 monthly from age 25, with a 7% annual return, could grow to about $1.2 million by age 65. Wait until 35, and you’ll end up with only $600,000.

In Conclusion

Deciding how much of your income to save for retirement is personal, shaped by your lifestyle, goals, and financial situation. While 15% is a solid starting point, adjust based on your age and needs. Remember, retirement planning isn’t just about accumulation (saving for retirement); it’s also about distribution (strategizing how to use your savings to stay retired). Both steps are crucial to ensuring financial security.

Working with our financial team can help you know the exact year you can retire and how much monthly income you’ll have. That way, you can feel confident about hitting your goals so that you can finally enjoy your financial journey to the seasons ahead.