It might be the most common question asked by retirement savers: How much money do I need to save for retirement?
There’s no one-size-fits-all answer to this question — it will be different for everyone based on a number of factors: time horizon until retirement, anticipated income in retirement, longevity, and desired retirement lifestyle.
However, there are some general guidelines that can help you get an idea of how much you should be saving for retirement.
Calculate It: Are You Saving Enough to Retire Comfortably?
Here are five rules of thumb to keep in mind.
1. Aim to save between 10% and 15% of your annual pre-tax income for retirement.
This assumes an approximately 40- to 45-year working career during which you are actively saving money for your retirement, such as between ages 25 and 67.
So if your annual gross income — before taxes and other payroll deductions are taken out — is $100,000, for example, your goal would be to save between $10,000 and $15,000 each year for retirement. Broken down further, you would want to devote between $833 and $1,250 each month to retirement savings.
If you participate in an employer-sponsored retirement plan at work — such as a 401k or 403(b) plan — and your employer matches your contributions, this could reduce the amount you need to save. Employer matches represent a guaranteed, risk-free return on your money. It usually makes sense to contribute at least enough money to an employer-sponsored retirement plan to qualify for a full employer match.
2. Determine how much retirement income you may receive from sources other than your savings.
This includes Social Security, of course. You can get a current estimate of what your Social Security retirement benefits could be at retirement by creating a personal my Social Security account at ssa.gov/myaccount.
Note that this is only an estimate based on current law, not a guarantee, of future Social Security benefits. The Social Security Administration estimates that by 2035, the payroll taxes collected to fund Social Security will be enough to pay only about 79% of scheduled benefits. Also, remember that Social Security benefits are not intended to be the only source of retirement income. According to the Social Security Administration, these benefits will only replace about 40% of the average American’s pre-retirement earnings.
Other potential sources of retirement income include pension plans, part-time employment and inheritances. However, less than a third of Americans (31%) are now retiring with a defined benefit pension plan, according to the Pension Rights Center.
A reverse mortgage is another potential source of retirement income. With this tool, you would receive monthly payments from a lender instead of making monthly mortgage payments. When you die or sell the home, the lender will receive the proceeds from the sale and use this to repay the loan’s principal and interest. While this tool can help increase the amount of funds available to you in retirement, there are risks and costs to be aware of.
3. Figure out how much money you’ll need to support your desired retirement lifestyle.
What kind of retirement lifestyle do you envision? Are you planning to travel extensively, join a private country club, eat out often at fancy restaurants, and engage in expensive hobbies? Or do you instead plan to stay closer to home, eat out and entertain less often, and live a more frugal lifestyle? The answer to this question will go a long way to determining how much money you’ll need in your nest egg when you decide to retire.
Read More: What Is the Average Retirement Income and How Do You Compare?
Also, where do you plan to live during your retirement years? You will probably need more retirement savings if you want to live in a city with high housing costs and an overall high cost of living like San Francisco or New York City than in a smaller, lower-cost city or rural area.
Read More: What Is the Average Retirement Savings By State?
One rule of thumb is to plan on needing between 70% and 80% of your pre-retirement income after you retire. This reflects the fact that you will no longer have certain expenses associated with working like commuting, purchasing work clothes, and eating out for lunch. Here’s a breakdown from the Employee Benefits Research Institute of how Americans of retirement age spend their money on average:
Age 65-74 75-84 85 and over
Housing 46% 44% 48%
Food 12% 13% 14%
Healthcare 10% 11% 13%
Clothing 3% 4% 3%
Transportation 12% 11% 7%
Entertainment 11% 9% 6%
4. Determine an annual withdrawal rate for your retirement savings.
The rate at which you withdraw money from your retirement savings will have a big impact on how long your retirement nest egg lasts — and in turn, how much you need to save for retirement.
One common rule of thumb here is what’s known as the “4% rule.” This rule assumes that you will withdraw no more than 4% of your retirement account balance each year. Using this rule, you can divide your desired annual retirement income by 4% to figure out how much you’ll need to have saved by the time you retire.
For example, let’s say your pre-retirement annual income is $100,000 and you believe you’ll need 80% of this to live your desired retirement lifestyle, or $80,000. In this case you would need total retirement savings of $2 million ($80,000/.04 = $2,000,000). This assumes a 5% annual investment return (after taxes and inflation) and that the 4% withdrawal rate is maintained every year.
5. Set age-based retirement savings goals.
This is a good way to track your progress toward meeting your long-term retirement savings goals.
Here are some potential benchmarks:
Age 30 — Have saved an amount equal to your annual salary.
Age 40 — Have saved an amount equal to three times your annual salary.
Age 50 — Have saved an amount equal to six times your annual salary.
Age 60 — Have saved an amount equal to eight times your annual salary.
Age 67 — Have saved an amount equal to 10 times your annual salary.
Next Steps for You
Just as the amount of money needed to retire varies per individual, so does the journey to get there. It can be daunting to take the first step, so focus on what you can control. Understand your net worth- what you owe vs. what you own- and prioritize. By knowing where you stand, you’ll become more mindful of your financial situation and better prepared to plan for your goals.
From there, the Personal Capital Retirement Planner can help you organize your plan, determine how much money you should save for retirement and evaluate if you’re on the right track to have the financial flexibility you desire in retirement.
You can also talk to a Personal Capital fiduciary financial advisor for more detailed guidance on your retirement saving strategies.