How much should you be saving for retirement? It's a question most people can't answer, with more than 80% of Americans reporting they don't know how much money they'll need to last through retirement, a survey from Bank of America Merrill Lynch and Age Wave found.
The truth is there's no easy answer for what you should be saving each month or how much you should be saving by retirement age. There are dozens of factors to consider, such as how many years you expect to spend in retirement, what type of lifestyle you want to live, whether you have any other sources of retirement income, etc.
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That said, saving a certain percentage of your salary can be a good benchmark to get a general sense of whether you're on track with your saving. Experts generally recommend setting aside around 10% to 15% of your salary for retirement, so if you're only saving 2% to 3% of your income, that probably won't be enough to retire comfortably.
So how much is the average worker saving for retirement? Between personal contributions and any additional contributions from an employer, the average worker is contributing around 10% of his or her salary to a 401(k), according to a study from Vanguard.
That might sound like most employees are on track with their retirement savings, but it's not as clear-cut as it may seem. Although saving 10% of your salary is a good general goal, you may need to save more depending on a few factors.
Why 10% of your salary may not be enough
Saving 10% to 15% of your salary is a good rule of thumb, but it assumes you've been saving consistently throughout your entire career starting at an early age. In reality, though, most people haven't been saving thousands of dollars every year since their early 20s.
If you've gotten off to a late start, you'll need to jump-start your savings to make up for lost time. Exactly how much you need to increase your saving rate, though, depends on your age.
By beginning to save at age 25, you should aim to save 10% to 17% of your salary every year to retire by age 65, a study from the Stanford Center on Longevity found. If you were to wait until age 35 to start saving, though, you'd need to save around 15% to 20% of your salary. Wait until you're 45 years old, and you'd have to stash away roughly 25% to 27% of your income to retire by 65.
So if you're late to the game and postpone saving until your 30s or 40s, saving just 10% of your salary likely won't cut it. The 10% rule of thumb also assumes that your salary is increasing as you get older, and therefore you're consistently saving more as you earn more money. So if you receive a pay cut or take a few years off working, you may need to save more than 10% of your income to make up for it.
The ideal way to calculate what you need for retirement
Saving a set percentage of your salary is an easy way to ensure you're saving a consistent amount, and it also helps you increase your savings over time as your income increases. But instead of saving a percentage of your income every paycheck and hoping it's enough to retire on, it's a good idea to calculate what you expect to need in retirement and then work backward to see what you'd need to save to reach that goal.
There are a few different ways you can determine your retirement number, or the amount you should have saved by the time you retire. One method is to use the Rule of 25, which says you can multiply the amount you expect to need each year in retirement by 25 to calculate what you should save by retirement age. So if you expect to need, say, $50,000 to live comfortably in retirement, multiply that by 25 to determine a retirement number of $1.25 million.
If you know what you'll likely be receiving in Social Security benefits, you can add those to the equation, too. So if you think you'll need $50,000 per year but $20,000 of that will come from Social Security, only $30,000 will need to come from your personal savings. Multiply $30,000 by 25 to see that your updated retirement number is $750,000.
This calculation is fairly rudimentary, but it's a good way to get a ballpark goal in mind. You can also use a retirement calculator for a more precise answer, but because most calculators use slightly different inputs to come up with an answer, you'll likely see a range of results. There's no "correct" answer for how much you should be saving, so when in doubt, save more than you think you'll need.
Once you have an idea of what you'll need to save to reach your goal, you can determine what percentage of your salary that is. So if, for instance, you learn you should be saving $500 per month, and you're earning $50,000 per year, that comes out to around 12% of your salary.
Also, don't forget about employer matching contributions. If your 401(k) plan offers them, they count toward your total savings. So if you aim to 12% of your income but your employer will match your savings up to 3% of your salary, you really only need to save 9% of your salary on your own.
Planning for retirement can sound complicated, and it's true that there's no easy answer for what you should be saving. But once you have a retirement number in mind and know what percentage of your salary you should be setting aside to reach it, you're already well on your way to achieving your goal.
