Most people know that saving for retirement is perhaps the most crucial part of a long-term financial plan. But, how much is enough? Will the money you save in your 401(k) be sufficient, or should you be saving much more than that?
We asked three of our retirement experts how much you should be saving for retirement, and here is the advice they shared.
Dan Caplinger: Most financial analysts say that your savings goal should run somewhere around 10% of your salary. By doing so, you'll put yourself on track toward being able to replace that income in retirement.
But personally, I'm a fan of more extreme savings strategies. If you have aspirations of early retirement, going beyond the 10% mark is crucial to cut more years off the end of your working career. Especially for higher-income earners, there's no need to boost your standard of living to match your salary. One thing some two-income couples do is to live off one paycheck and save the entire amount of the other paycheck, putting their savings rate around 50%. Whether they use that amount to pay down credit card or student loan debt or they simply invest their savings, setting aside such a large portion of their earnings has the dual effect of boosting their net worth while also keeping a frugal lifestyle that will make it easier for them to retire with a more modest retirement nest egg than they might otherwise need.
To boost your savings rate, you don't need to make a huge jump all at once. Even if you just commit to putting future raises toward savings, that percentage will go up gradually throughout your career. Either way, saving more will eventually make a huge difference to your financial situation in retirement.
Leo Sun: To follow up on Dan's point, I agree that many financial advisors tell clients to save 10%-15% per year. But a Forbes analysis estimated that for 10%-15% in annual savings to translate into a sustainable retirement fund, a person needs to start socking that much away between the ages of 20 and 25. If a person waits until age 30 to start saving, that percentage rises to 20.1%. By age 40, it hits 43.2%
Another retirement study from Fidelity Investments states that by the age of 35, the average American should have savings equivalent to his or her annual salary. By age 45, a person should have saved three times their annual salary, and by a retirement age of 67, a person needs to save eight times their annual salary to comfortably retire on their current lifestyle. Those two studies offer a far more dynamic picture than a flat recommended rate of 10%-15%.
The lesson is a classic one -- start saving as much as you can, and as early as you can. Unfortunately, not many people are listening. The National Institute on Retirement Security recently reported that retirement-age American households only had average retirement savings of around $100,000 -- nowhere close to eight times the average annual American household income of $52,000.
Dan Dzombak: While those with lower incomes may find it hard to save money, the most important thing is to at least save some money each month so that you build the habit of saving. Many people never get into the habit and reach middle age with no real retirement savings. A recent study found the average 50-year old only has $43,800 saved up for retirement which is nowhere near enough. However, it's never too late to start.
The easiest way I've found is to set aside a set amount of money from each paycheck and put it in a separate account. The best way to do this is with an automatic withdrawal from your paycheck with that money going into a 401(k). A 401(k) is generally better than putting the money into an IRA as most employers match some portion of your contributions, greatly increasing the amount of money you are saving.
With the saving habit formed, you can focus on making more money so that you can put away significant amounts of money for retirement as your income grows.