How Much Should I Save for Retirement?

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Aim to save at least a total of 15% of your pretax income each year from an early age of 25 until age 67 as a rule of thumb. Of course, save more if possible. Together with other steps, it should help ensure that you have enough income to maintain your current lifestyle in retirement. While 15% may seem like a lot, if you have a 401(k) or other workplace retirement account with an employer match or profit sharing, that employer match or profit- sharing counts toward your annual savings rate.


Of course, 15% is just a guideline. Your annual savings rate may be higher or lower depending on when you want to retire, how you invest, and how you want to live in retirement.

Let’s look at a hypothetical example. Consider Jane, age 25, who earns $54,000 a year. Let’s assume her income grows 1.5% a year (after inflation) to about $100,000 by the time she is 67 and ready to retire. To maintain her lifestyle throughout retirement, let’s estimate that about $45,000, or 45% of her $100,000 preretirement income, needs to come from her savings. (The remainder would come from Social Security.) Because she takes advantage of her employer’s 5% dollar-for-dollar match on her 401(k) contributions, she needs to save 10% of her income each year, starting with $5,400 this year, which gets her to 15% of her current income.

Is 15% enough? That depends, of course, on the choices you make before retirement—most importantly, when you start saving, how you invest, when you retire, and how you want to live in retirement.

Here are three things you can do to produce better outcomes.

1. Start Young.

The single most important thing you can do is start saving early. The earlier you start, the more time you have for your investments to grow—and recover from the market’s inevitable downturns. You may not yet have the financial obligations of a home and family, so it may be easier to contribute more in your twenties now. And you give your savings years and years to grow.

2. Invest in Growth Model Strategy.

While saving early and consistently is critical, you will also need your money to grow. That’s why we suggest investing a significant portion of your savings over the course of your lifetime in a diversified mix of U.S. and international stocks and stock ETFs—generally more when you are in your 20s, 30s, and 40s and less as you near and enter retirement. Stocks have historically outperformed bonds and cash over the long term. So if you are investing for a goal like retirement that is years away, it can make sense to have more of your savings invested in stocks and stock ETFs.
Of course, stocks come with more ups and downs than bonds or cash, so you need to be comfortable with those risks. But over time, history has shown that disciplined savings and investing for long-term growth has paid off.

3. Work Longer.

Our 15% savings rule of thumb assumes that a person retires at age 67, which is when most people will be eligible for full Social Security benefits. If you don’t plan to work that long, you will likely need to save more than 15% a year. If you plan to work longer, all things being equal, your required saving rate could be lower. Delaying retirement means you have more time to save, a shorter retirement, and higher Social Security benefits.

What Else?

Saving at least 15% of your income each year is our suggested rule of thumb. But the only number that really counts is yours.

1. Let Uncle Sam help. Make the most of tax-advantaged savings accounts like traditional 401(k)s and IRAs. Your contributions are made before tax, reducing your taxable income, meaning you get a tax break the year you contribute. Plus, that money can grow tax free until you withdraw it in retirement. With Roth 401(k)s and IRAs, your contributions are after tax, but you can withdraw the money tax free in retirement—assuming certain conditions are met.

2. Max and match. Got room to up your 401(k) and IRA contributions? Increase your automatic contributions as much as possible. At the very least, take advantage of your company match if you have one. That’s effectively “free” money.

3. Take the 1% challenge. Upping your saving just 1% may seem small, but after 20 or 30 years it can make a big difference in your total savings. If you are in your 20s, a 1% increase in savings could add 3% more to your income in retirement.

4. Catch up. If you are 50 or older, be sure to make the most of catch-up contributions to your retirement savings plans. For 2021, employees over 50 can contribute an extra $6,500 over the $19,500 limit for their 401(k) for a total of $26,000. Also, you can contribute an extra $1,000 in addition to the $6,000 limit to an IRA for a total of $7,000 in 2021.

Finally, make sure you have the right amount of stocks, bonds, and cash to stay on track to meet your long-term goals. If you need help deciding what is the right mix for you, your goals, and circumstances email Aspetuck Financial Management.