How Much You Should Be Saving for Retirement

Finance experts recommend that the amount you should be saving for retirement should be 10% to 15% of your annual income but you can learn what works for you in our guide.

Living your dream life at 80 begins with what you are doing as regards savings now. And it is important that you save enough to keep you far from worrying over retirement. But you may have gone numb with the million-dollar question too:

How much should I save for retirement?

Experts believe that if you are able to save 15% of your pre-tax income annually from 25 to 67, you should have enough along with other steps, to keep you maintaining your current lifestyle in retirement.

A stat according to Fidelity.com shows that most people will need around 55% to 80% of their preretirement income to maintain their lifestyle in retirement.

The money may not be totally from the savings they make; some will come from Social Security. Study carried out by the publication showed that people will need to generate at least 45% of their retirement income (before taxes) from savings. And carefully curated data revealed that if you save for 42 years as a 25-year-old adult, you’ll be able to live your current life when retired. But then if pension comes in, your target savings rate may drop.

15% may seem huge at first, but this hypothetical example by Fidelity.com could give a clearer outlook:

Joanna, age 25, earns $54,000 a year. We assume her income grows 1.5% a year (after inflation) to about $100,000 when she turns 67 and is set for retirement. To keep up with her preretirement lifestyle all through retirement, it is estimated that about $45,000 each year (adjusted for inflation), or 45% of her $100,000 preretirement income, needs to come from her savings. (The remainder would come from Social Security.)

Because she takes advantage of her employer’s 5% dollar-for-dollar match on her 401(k) contributions, she needs to save 10% of her income each year, starting with $5,400 this year, which gets her to 15% of her current income.

But then, is 15% enough throughout retirement?

Well, a few factors before your retirement determine this. When you start saving, when you retire, other streams of income such as pension should also be put in view.

But there is really no singular formula to be considered when it comes to saving for retirement. Your future – figured and unfigured situations – such as your lifestyle preferences, current spending and saving level, life expectancy will come into play.

These four steps will help you figure out how much you should be saving for retirement.

1. Give an appraisal of your future income need

To project your future spending, it is very important to look at your current spending. It is important that you put in the required work here to draw out an estimate to give a good picture of your future income needs.

To do this, input your typical monthly spending in a spreadsheet, on the first column, or on a piece of paper. After this, look critically into this if your expenses will most likely increase, decrease, be maintained, or become extinct in retirement.

In column two, provide your best guess of what you think each of your expenses in retirement will be.

Add them together and tack on things you are likely to spend on later but may not budget for now. Consider things like ballroom dance lessons, travel, mahjong supplies, and golf. With this, you are likely to be able to project a rough idea of your spending needs every month in the future.

Multiply your result by 12 to find out the amount you may be needing each year to attain the expenses in your retirement. Now, check out your current income and compare to come up with what is called a “replacement ratio” or how much of your income should be targeted to be replaced in retirement.

 

2. Put the common rules of thumb into consideration

A 2021 survey by the Employee Benefit Research Institute’s retirement confidence survey showed that 7 in 10 workers are confident that their financial status can scale them comfortably through retirement. But at least 1 in 3  workers admit that the COVID-19 pandemic dealt a huge blow to retirement savings plans.

If you think you need to make adjustments on your finances as a result of job loss or other financial crisis, it may be safe to keep a rule of thumb in mind based on your finances.  The 85% rule:

 “If you’re saving 15% of your income now, you could easily live on 85% of your income in retirement — without adjusting expenses.”

A more loose rule is the 80% rule which says that you must aim at replacing 80% of your pre-retirement income. While some suggest 90% is more conservative, some others think skewing toward 70% is better. A safe decision is to consider the percentage of your income that is being saved for retirement. You will not have to do that after bypassing the hypothetical finish line – meaning that saving 15% now would provide you 85% of your income in retirement without the need to adjust your expenses.

With Social Security added and payroll taxes lowered, you can possibly bring that figure down a bit more. The better approach is to consider a rule of thumb like this as a gut check against the more direct approach of taking a more in-depth consideration of your expenses. Are you in any way close to the standard advice or far off?

You can, however, consider this as a starting point to twist the figures.

 

3. Checkout with a retirement calculator

If you have done well on your estimation, a good retirement calculator will help you assess your position on the progress of your savings by uniting the estimates of your annual spending with projections. To discover the more precise figures, consider if the assumptions are correct in view of your situation.

Is your strategy on investing set for a default return used by a calculator, which is likely to hang over 6% to 7%? You may want to bring it down if you think you’re skewing towards bonds.

You may also want to see if you have a history of aged people who live beyond 100. All things equal, you might be towing that path too – put the extra years in consideration.

 

4. Review your plans periodically

Your plans should be revisited from time to time because situations change and your retirement needs will also be affected. Depends on what it is – a new baby, job, different partner, vacation goals for retirement – do your retirement calculations fairly often.

You’ll find it safer doing the required adjustments as you move on in life than having a hard time keeping up with the numbers down the road.