You're probably well aware that it's important to save for retirement during your working years. Without a decent-sized nest egg, your retirement may end up being a very financially stressful period of life.
But how much should you be saving exactly? That's the tricky part.
It's hard -- make that impossible -- to predict how long you'll live. And to an extent, it may be difficult to predict what your living costs will amount to if retirement is somewhat far off. After all, most of us know to anticipate some degree of inflation. But the question is, how much?
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If you feel lost in the context of establishing a retirement savings goal, you're not alone. But here's some advice that might help.
Start with general guidance
The amount of income you'll need in retirement is going to be personal to you. In other words, your close friend may do just fine with a $500,000 nest egg, while you might need $1.5 million in your 401(k) or IRA to meet your goals.
That said, there are some general rules of thumb you can follow when it comes to determining how much to save. Fidelity says you should aim to have 10 times your income saved by the time you retire. Other guidance might indicate that 12 times your income is a better bet. You can use these targets as a starting point and adjust them based on your personal objectives.
It might also help you to know that generally speaking, retirees need about 70% to 80% of their former income to live comfortably. Again, there are always exceptions. But as a starting point, know that if you're used to making $100,000, you may want access to $70,000 to $80,000 per year in retirement income.
That doesn't all have to come from your savings, though. Some of it could come from Social Security and other income sources you may be privy to, such as a pension from your employer.
Think of what you want retirement to look like
A nest egg equal to 10 to 12 times your ending salary -- or one that allows you to replace 70% to 80% of your pre-retirement income -- may be a good thing to aim for to start. But you'll also need to incorporate your personal goals and lifestyle into the equation.
To that end, think about the things you spend money on now. Are any of those expenses likely to shrink? If you anticipate having a paid-off mortgage, or if you expect to downsize to a smaller home, that could make the case for being able to get by on a little less money in retirement than what the above guidelines allow for.
On the other hand, if you currently spend a decent amount of money on entertainment, know that you may end up spending even more in retirement once you have additional free time on your hands. Similarly, if you're someone who wants to travel a lot once you're no longer working, that's an expense to consider, too. And depending on just how much you want to travel and what you want to do with your days, you could make the argument that aiming for an annual income equal to 90% of your ending wages is a better bet than 70% to 80%.
Don't sweat the exact number
All told, it's hard to determine exactly how much retirement income you'll need. But know this -- as retirement gets closer, that number should become easier to nail down. Until then, use general guidance to your advantage, but make tweaks based on your personal goals and reality.
And also, simply do your best to fund your IRA or 401(k) as much as possible. There's really no such thing as "over-saving" for retirement. So if you end up with enough income as a senior to replace 100% of your salary when you could've done just fine on 80%, that's hardly a bad place to be.
