How much should you save for retirement? This is perhaps the burning question in our adult lives, at least when it comes to work. We work to be able to afford nice and essential things here and now, of course, but also so that our future selves will have the life we want, or think we want one day in the distance.
So how much should you save for retirement? The answer, however unsatisfying, is that it depends.
It depends on your financial situation: Are you already financially independent, or close to it? Or are you paying off a mountain of debt? Are you getting a steady income that you expect to rise in the coming years? Or are you a freelancer, gig worker or independent contractor whose income varies from month to month, year to year?
It depends on how you envision your retirement: Will you sail across the Mediterranean (or at least regularly fly to see the grandchildren)? Or are you hoping to keep things more low-key – downsizing to an apartment in a walkable area, instead of commuting to work every day?
It depends on your health and what age you plan to retire. Do you expect to live a few decades after you leave the workforce? Or do you expect healthcare costs to be a big expense right away?
And it depends on how old you are now. If you̵7;re approaching 50, you may already have a lot stashed away in your 401(k) plan or a traditional IRA, or you may be faced with the realization that you don’t have much time to start saving. But if you’re nearing 30, you may think you still have plenty of time to start saving—or you’ve realized that starting now will allow you to retire.
And heck, it depends on your attitude towards money. If you think it’s for spending, because you only live once, you may be hard pressed to sweep money away for a long time. If you’re a natural-born saver, you may already have a nest egg in the works.
Phew. There is a lot to think about. So while the answer to the question “How much money should I save for retirement” may be “It depends,” there are still some proven concepts you should know and consider. Let us break them down for you here.
How much do you need to retire?
Despite all the complicated considerations above, there are still some general rules of thumb when it comes to retirement.
Many experts recommend aiming to have about 10 times your annual salary set aside by age 67. So if you earn, say, $80,000 a year, you’d aim to have $800,000 saved by age 67.
Given that experts also recommend aiming to withdraw 85% of your current income in retirement — in this hypothetical case, $68,000 a year — that’s enough to last you nearly 12 years. And that’s before taking into account Social Security, and the fact that many retirees spend more in early retirement than they do in their later years.
Obviously, you may need more and you may need less, depending on how you envision your retirement (and what savings you may have beyond those listed above). There are also additional complexities to consider such as future salary increases, the rate of inflation and the ability to earn a return on the money in your retirement portfolio. (For example, if you invest in a 401(k), your savings will likely earn additional money by investing.)
But with these ballpark figures, you’ll have an idea of how much you’ll need to retire. (And you can always use a retirement calculator to get recommendations tailored to your situation and goals, or consult a financial advisor for a personalized retirement plan.)
How much do you already have and how long until you retire?
We’ll discuss this in more detail below, but if you’re wondering how much you need to save for retirement, you should start by considering how much you’ve already saved and how many years you have left in the workforce.
If you’re young and already saving, congratulations — you’re in the best possible position for a prosperous retirement. Or if you’re nearing retirement and have chipped away at the recommended 15% of your income since you started working, chances are you’re in a pretty good place too.
Young and not saving? You have time. And best of all, anything you put away now should increase in value over the coming decades.
Older, not yet saved? Not ideal, but with some dedication you can still right the ship.
As for the rest of us who are somewhere in between, keep reading.
The benefits of starting early
As we said, if you’re young, you have plenty of time – all the more reason to start saving early. Best of all, the money should earn money, compounding your savings. If you assume a relatively conservative return of around 4% on your investments, for example, every dollar you save will be worth $4 in 35 years.
And to be clear, we define young as in their 20s and 30s. These are the years when you probably earn less than you will in the end. But every dollar you can save now will be worth exponentially more in retirement. For many of us, these are also the years when we are childless, or even still living at home – meaning years when there are fewer demands on our wallets, leaving more to potentially save.
And again, every dollar you put away can be worth four times as much in retirement. That means the difference between putting away $100 and $200 a month now will be nearly $90,000 by the time you retire — more than many people’s annual salary.
Haven’t you started saving for retirement? There is still time
If you’re in your late 30s or 40s, you may think it’s too late to start saving for retirement. What if.
Hopefully, you’ve been able to budget enough to pay off debt and build an emergency fund. If not, start there (and consider leaving room in your budget for retirement savings, too). Look at where you can cut back on spending—eating out less, cutting back on streaming services you don’t use, cutting back on vacations—and put that money aside for retirement.
You may also need to adjust your expectations for your pension, which in turn will reduce the amount of money you need.
That all said, thanks to the magic of compound interest (and generally favorable market returns over time), every dollar you save now will pay off down the road. Let’s say you’re 40 and have $20,000 already set aside. If you contribute $200 to that fund, again at a conservative 4% return, that fund will be worth $172,727 when you retire in 27 years – about half of which will come from interest.
But let’s say you can put away $100 more each month and get a 6% annual return. The same seed fund of $20,000 will be worth almost double: $332,028.
Another hypothetical. Say you make $50,000 a year at age 40. You have that $20,000 fund. You put away the recommended 15% per month — $625.
Again, assuming a modest 6% return, you have $587,241 in savings – more than the recommended ten times your annual salary. And also without With a $20,000 head start, your savings will be worth nearly $491,000, which is nearly the recommended amount for your retirement savings goal.
Start late? Here’s what you should know
If you’re 50 or older, you’ve probably seen and experienced enough to know that life is hard to predict and can pull you in unexpected directions. Sometimes these surprises are good (you fall in love with a city you never thought you’d live in). Sometimes these surprises are bad, like if you’re 55 and have little or no retirement savings.
Again, technically there is still time. But you may have to make some sacrifices.
You may need to work after 67. You may need to cut back on expenses dramatically to put away all you can. You may have to drastically reduce your retirement expectations.
Some silver linings: It’s possible that you’re at the height of your earning potential, after spending so many years in the workforce. If you have children, they may be in adulthood (or close to it), reducing your expenses. Maybe your mortgage is almost paid off. And although it’s emotionally painful, you may have inherited some money after a parent or relative died.
Either way, if you can put away a significant amount of money now, those repayment contributions will pay off in time for your retirement. For example, if you can put away $1,000 a month and your retirement fund earns a modest 6% annual return, you’ll have $162,473 in savings ten years from now—almost a quarter of the interest. (That is, money earned from your money.)
If you already have a certain level of savings, the extra money could be enough to get you to the recommended 10 times your annual salary. Every little bit helps. (And if you’re reading this while you’re still young, keep that in mind as you consider whether to start saving for retirement now.)
What about life insurance?
The sad reality is that not all of us will make it in retirement. Life insurance is a way to provide financial protection for your loved ones should the worst-case scenario occur.
Simply put, you buy an amount of coverage (often five to 10 times your annual salary) for the period of time you need coverage (the term). These are usually the years when you draw an income and have people (such as children or a spouse) who depend on that income for everyday expenses. Life insurance is a way to make sure your loved ones have money to pay for things in case you’re not around.
At Haven Life, you can usually buy that level of coverage for less than your monthly streaming budget – for example, a 30-year-old woman in excellent health can buy a 25-year, $500,000 term life insurance policy from Haven Term starting at $20.81 per month. (Find out your real rate by getting a free quote online today.)
If you live to the end of your term, your cover will end and you will no longer pay premiums. And if that expiration date coincides with your retirement, congratulations — we sure hope it’s everything you want it to be and more.