How Much Should I Save for Retirement?

No matter where you are in your career, you're probably wondering how much of your income to save for retirement. Though there's no one-size-fits-all answer, ideally, you should be saving at least 10% of your earnings for the future, and the more money you put away, the more flexibility you'll have once you retire.

How much do I need to retire?

The amount of money you'll need in retirement will depend on a number of factors, including:

• Your health
• Your living expenses
• Your goals and desired lifestyle

Healthcare is a major expense for retirees, so much so that the average healthy couple might spend as much as $377,000 over the course of retirement. Now if you're in top physical shape, you might spend less, but if you have health issues, you could spend even more. Healthcare is one of those non-negotiable retirement expenses, and it's the one spending category that tends to climb once seniors stop working -- so plan accordingly.

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Your living expenses, meanwhile, will depend heavily on where you choose to retire and how much it costs to put a roof over your head and get around town. According to AAA, it costs $8,700 a year on average to own a vehicle, so if you can get away with walking or taking public transportation, you stand to save a bundle. Similarly, entering retirement mortgage-free can greatly reduce your housing costs, as can downsizing to a home that's less pricey to maintain.

Finally, you'll need to think about how you want to spend your time in retirement. Traveling the globe and frequenting the golf course will cost more than tending to your garden and going to events at your local community center, so be honest about your personal goals.

With all of this mind, remember that while the average senior needs 70% to 80% of his or her previous income in retirement, some people can get away with a little less, while others need much more. In fact, data from the Employee Benefit Research Institute found that 46% of households spent more money during their first two years of retirement than they did before they stopped working, while 33% of retirees upheld this trend for a good six years. While you might think you'll spend less money by virtue of not having a job to go to, consider the fact that paying for healthcare or occupying your newfound free time might cost more than expected.

Finding your retirement number

Once you make some key retirement decisions, like where you think you'll live and what you'll do with your time, you can begin to come up with a savings target. Of course, this number won't be perfect, but it can help you develop a savings strategy.

Let's assume that based on your goals and desired lifestyle, you think you'll spend $6,000 a month, or $72,000 a year, in retirement. Let's also be optimistic and assume you'll have a 30-year retirement to fund. From here, we can use the 4% rule to figure out how much (roughly) to save in total.

The 4% rule states that if you begin by withdrawing 4% of your retirement savings balance during your first year of retirement and adjust subsequent withdrawals for inflation, your savings will likely last for 30 years. Though the rule has its flaws, it's a good starting point for establishing a savings goal.

Now let's not forget the role Social Security will play with regard to your retirement finances. Though estimating your benefits can be tricky when retirement is decades away, you can use this tool to get a sense of what your payments might look like. So let's assume you're looking at $2,000 a month, or $24,000 a year, in Social Security benefits. This means you'll need to come up with $48,000 a year on your own to cover your anticipated expenses. Multiply that figure by 25, and you've got a savings goal of $1.2 million according to the 4% rule.

Save consistently, invest wisely

Now if you're looking at that $1.2 million figure and wondering how on earth you'll ever get there, fear not. If you start early enough, and invest appropriately, you can grow relatively small contributions into an impressive nest egg over time.

Currently, workers under 50 can contribute up to $18,000 a year to a 401(k) and $5,500 to an IRA. Those over 50 get to contribute up to $24,000 and $6,500 a year, respectively. Let's assume you don't have a 401(k) but are able to max out your IRA at $5,500 year after year. Let's also assume that you put together a stock-focused portfolio that generates an average annual 8% return, which is just below the market's historical average. The following table shows how much money you'll have by age 67 based on when you first start saving:

TABLE AND CALCULATIONS BY AUTHOR.

As you can see, maxing out IRA contributions from the start of your career will leave you with upward of $2 million for retirement. Even if you don't begin saving right away, starting at age 27 will still give you well more than that $1.2 million target, while starting at age 32 will get you fairly close.

Now keep in mind that the above table takes salary out of the equation. If you're earning something in the ballpark of $55,000, then saving $5,500 a year for retirement puts you in pretty good shape. But if you're earning double that amount, $5,500 a year may not be enough to help you meet your eventual goals. That's why your contributions should evolve as your salary grows -- so that your savings do a good job of buying you the lifestyle you've grown accustomed to once you reach retirement.

Another thing to keep in mind is that the above numbers would read quite differently under a less aggressive investment strategy. Take a look at that $2.12 million total -- it's based on just $247,500 of actual contributions ($5,500 a year x 45 years). The reason that $247,500 grew into $2.12 million was the 8% return we factored in, but here's what those numbers might look like under a conservative investment strategy yielding half that return:

TABLE AND CALCULATIONS BY AUTHOR.

You can't help but almost gasp at the difference between an 8% and 4% average yearly return! While some people are more naturally risk-averse than others, if you really want to grow your savings into a sizable nest egg, you'll need to either save more money or invest more aggressively. The choice is yours.

Remember, there's no universal formula when it comes to retirement savings. There are numerous factors that come together to dictate how much money you'll eventually need. But if you do your best to determine your living costs, establish a savings target, contribute consistently to an IRA or 401(k), and invest wisely, you'll be putting yourself in a good position to retire comfortably.