One of the trickiest things about socking money away for retirement is trying to figure out how much to save. You'll often hear that rather than landing on a random number, like $1 million, you should instead base your savings goal on your personal needs.
To that end, you'll often hear that it's a good idea to retire with 10x your ending salary socked away in an IRA or 401(k) plan. It's advice that big names like Fidelity have long given out and a reasonable starting point if you're clueless about how much to save.
But that doesn't mean you should fixate on retiring with 10x your salary in savings. Instead, think about what you want your retirement to look like.
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You may not need 10x your ending salary
Aiming to save 10x your final salary could set you up with a nice nest egg for retirement. But it could also cause you undue stress -- especially if you consistently lived below your means and plan to do so in retirement, as well.
Let's say you make $120,000 a year. With Fidelity's advice, you'd be aiming for a nest egg of $1.2 million. And if you were to withdraw from a balance that size at a rate of 4% per year, which financial experts have long recommended, you'd be looking at $48,000 in annual income.
But maybe you don't need $48,000 a year from savings in retirement. Maybe you have $30,000 a year from Social Security to look forward to and expect to be able to live on a total annual income of $50,000. In that case, you'd only need your savings to provide you with $20,000 a year, which means that, conceivably, you could get away with saving more like 5x your ending salary instead of 10x.
You might need well more than 10x your ending salary
On the other hand, maybe you have lofty goals for retirement. It could be that you're hoping to travel internationally once every few months and live in an expensive city that gives you access to nightlife.
Going back to our example, in that scenario, $48,000 a year in income from your savings may not be enough. You might need more like $60,000 or $70,000 to get to do all the things you want to do. In that case, you'd potentially need to save more like 14x your salary.
Come up with a goal that's specific to you
If you have no idea how to go about setting a retirement savings goal, then aiming for 10x your ending salary isn't a bad idea at all. But also sit down with a financial advisor and discuss your long-term plans. They may be able to help you narrow down a savings target that allows you to enjoy retirement to the fullest, without pressuring yourself to save more money than you need to.
