How Much Do You Really Need to Save for Retirement?

By: Christina L White, CFP®

We are always hearing stories about how the majority of Americans do not have enough saved for retirement. Retirement may be coming up soon or may be a long way off for you, but how do you know if you’ve saved enough?

First, you need a general idea of how much you expect to spend in retirement. A general rule of thumb used by financial planners is that you’ll need at least 70% of your pre-retirement income. Less income is typically needed in retirement due to changes in spending and the elimination of FICA taxes and retirement savings.

The below chart from the JP Morgan Guide to Retirement shows an example of income replacement needs in retirement. 

A pre-retirement household gross income of $150,000 equates to $108,000 post-retirement gross income to maintain the same lifestyle because of reductions in savings, expenses, and taxes. The chart deducts 9% for pre-retirement savings, 5% for change in expenses, and 14% for change in taxes. The remaining 72% is the amount needed to maintain existing lifestyle expenses which will have to be covered by social security benefits and money withdrawn from retirement plans and/or pensions.

The post-retirement income replacement value hovers around 70-80% for most income levels, but the more pre-retirement income you make, the more you have to save in retirement accounts, as shown below.

Social security will cover a greater proportion of retirement income for lower household pre-retirement incomes. For higher pre-retirement income households, a greater proportion of retirement income will have to come from retirement plans and pensions to maintain their current lifestyle

Next, let’s look at how much you need to save to meet your retirement spending goal. When it comes to saving for retirement, the earlier you start the better. If you can start saving for retirement in your 20s, you may only need to put away 10 -15% of your income to meet your retirement goals. If you start later, that percentage increases because you have fewer years to benefit from compounding returns on your investments. The chart below shows how the percentage of income you need to save depends on both the age when you start and how much you make.

For example, a saver starting at age 30 making $75,000 per year will have to save at least 13% of their income in order to maintain their standard of living in retirement. A saver starting at age 45 making $150,000 per year will have to save at least 41% of their income to retire at age 65 and maintain their lifestyle. These examples assume that retirement starts at age 65 and continues for 30 years, pre-retirement investment return averages 6%, post-retirement investment return averages 5%, and inflation averages 2.25%.

As you can see, it becomes increasingly difficult to sufficiently save for retirement the longer you wait. This may mean you need to take a more significant reduction in lifestyle during retirement, delay retirement past age 65, or plan to work part time during retirement to increase your income. 

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