When you think of your lifelong bucket list, what does it include? Adventures across another continent? Courtside tickets to watch your favorite NBA team play? No matter what dreams you’re chasing, one essential item probably sits at the top of your list: Retirement. While it might not sound as exciting as traveling the world, retiring is the ultimate financial goal, and ensuring you can tick off that box starts with saving now. But if wondering, “How much do I need to retire?” has been keeping you from getting started, you’ve come to the right place.
1. Retirement Savings Depend on Your Lifestyle
2. Calculate How Much You’ll Need
3. Savings by Age Benchmarks
4. Savings Strategies to Start With
5. Retirement Accounts for All Savers
6. Catch Up, No Matter Where You Are
How much do I need to retire?
- You will probably need at least $1 million, but the actual amount depends on personal factors.
- When you retire and your lifestyle will impact how much you need to save.
In general, it’s recommended that you save somewhere between $1 million and $2 million for retirement — though this is a wide range and will vary depending on your personal finances and preferences. But while you can use a few different rules of thumb during retirement planning to estimate how much you’ll need (which we’ll discuss shortly), everybody is different. Ultimately, how much you need to save for retirement depends on a number of variables unique to your lifestyle, specifically:
- What age you plan to retire
- When you will begin taking Social Security benefits
- Your lifestyle (think hobbies, traveling, and where you’ll live) as a retiree
Retirement Savings Rules of Thumb
- Save enough to spend 80% of your pre-retirement salary each year in retirement
- Only spend 4% of your total nest egg annual during retirement
The first step to estimating out how much you’ll need to save for retirement is calculating about how much you’ll likely spend each year. A common way to do so is assuming your annual retirement income should be about 80% of your pre-retirement salary. Here are some examples of what that might look like:
|Pre-Retirement Salary||Retirement Income|
(Of course, this amount depends on whether you want to maintain, upgrade, or downsize your lifestyle.)
Next, to determine how much you’d need to save in total, you can use the 4% rule, which implies that you should only use 4% of your total retirement savings each year in order to not run out of money. To use this formula, you divide your predicted annual spending by 4% — so using the example above, you’d divide $80,000 by .04 to get a total of $2 million.
It’s important to note that the 4% rule should be used strictly for estimating your retirement needs. Depending on any investments and annual investment yields, as well as your Security Benefits and length of retirement, your actual amount will vary. Think of the 4% rule as a tool for setting general goals. A retirement calculator, like Bankrate’s, may help you pinpoint a more specific amount.
How much should I be saving now?
- Aim to save one times your salary by age 30
- Increase your savings by your annual salary every five years
The thought of saving a couple million dollars by your 60s or 70s can sound daunting, we know. That’s where breaking up your retirement savings with age-based benchmarks may help. By looking at your savings in five- or 10-year increments, it’s easier to plan financially and put actionable savings steps in place.
One popular age-based savings recommendation is that you should aim to save one times your salary by age 30 and increase your savings by your annual salary every five years.
|By Age...||You Should Aim to Save...|
|30||1 x your income|
|40||3 x your income|
|50||5 x your income|
|60||7 x your income|
|70||9 x your income|
Using this method, you should have saved seven times your income once you’ve reached 60 years of age. But some recommend ramping up savings even further in your 50s and beyond, so that by the time you’re 67, you have 10 times your income in your nest egg.
Just remember, these are ambitious benchmarks, and you may not meet each one. Life is unpredictable, and there’s a pretty good chance you’ll have some other big goals to save for on your way to retirement. If you have to slow your retirement savings for a couple years, you can always take action to catch up later (we’ll discuss how in a bit).
Savings Strategies to Get You Started
- Start saving ASAP — no matter how little
- Work up to saving 10% to 15% of your pre-tax income each year
- Take advantage of any employer matching contributions
So, how do you begin to aim for these goals? It starts by saving as early as you can. That’s because the longer your money is invested in the market, the more time and opportunity it has to grow and generate returns. Plus, when you are in your 20s and 30s (and still have a few decades to save), you have more time to weather market ups and downs, meaning you may be able invest with a more aggressive asset allocation — in other words, you might invest more heavily in securities like stocks, ETFs, and mutual funds, rather than fixed-income securities like bonds.
It’s often recommended to save between 10% and 15% of your pre-tax income in a tax-advantaged retirement account (like a 401(k), 403(b), or an IRA) starting in your early-to-mid 20s, all the way until retirement. But this isn’t always possible — and that’s okay.
Fifteen percent of your pre-tax income can feel pretty significant, so when you begin, start with a percentage you can manage — even if it’s only 2 or 3%. From there, aim to up your contributions by 1% each year until you reach 15%.
If your employer offers a contribution match for your 401(k), that can help you reach that 15% goal even faster. For example, your company may match 50 cents for every dollar you contribute up to 6% of your salary. In this case, if you set aside 6% of your salary, with your employer match, you’d be at 9% total. It’s a great idea to take advantage of matching as soon as you can — it’s basically free money for your retirement fund! Keep in mind, company-sponsored retirement plans vary, so make sure to discuss yours with your employer.
Retirement Accounts For All Kinds of Savers
- Invest with a 401(k) or IRA (or both)
- Save in the bank with an IRA savings account or CD for increased security
- Save in a traditional savings account for maximum flexibility
Don’t have a 401(k)? Don’t panic. Individual retirement accounts (IRAs) are a great option for retirement savings. You can choose between a traditional or Roth IRA to save in an account that makes the most sense for you.
Expert tip: Did you know you can have both a 401(k) and an IRA? If you want to supercharge your savings, have more investment choices or flexibility, or be more in control over your tax situation, supplementing your 401(k) account with an IRA could be a good choice for you.
Want to save but not interested in investing in the market? You might consider tax beneficial options like an IRA Online Savings Account or IRA Certificates of Deposit (CDs), or a traditional Online Savings Account.
Catching Up, No Matter Where You Are
- Automate your savings
- Work your way up to maximizing annual IRA and/or 401(k) contributions
- Use catch-up contributions beginning at age 50
- Supplement your retirement accounts with a traditional savings account
You’ll often hear that it’s never too early to start saving for retirement. The thing is, it’s never too late, either. If student loans, a rocky job market, debt, or any other reason kept you from saving in the past, that doesn’t mean you can’t get your savings on track and make the most of your retirement fund.
First things first: Like we mentioned earlier, if you have an employer-sponsored plan that offers a match, make sure you are taking advantage of it fully. That’s a simple way to give your savings a big boost.
Next, take advantage of automation — whether that means automatically diverting a portion of your paycheck into your 401(k), setting up monthly transfers from your checking account to your IRA, or perhaps turning on recurring transfers for your Online Savings Account retirement bucket. By putting your contributions on auto-pilot, you won’t have to worry about remembering to fund your retirement account.
Finally, aim to work your way up to maximizing your contributions, as retirement accounts have contribution limits. Make sure to visit the IRS website to stay up to date on current limits.
2020 Annual Contribution Limits:
|Under Age 50||Age 50+ Catch-Up Limits|
Not yet 50 but want to save even more? You might consider storing additional retirement funds in a high-yield savings account like our Ally Bank Online Savings Account. That way your funds will be FDIC-insured, while still earning interest at a competitive rate.
Or, you might consider an investment account to accompany your other retirement savings accounts. With a Managed Portfolio, you can give your money the opportunity to grow over time while you invest hands-free.
No matter where you are in life or what you envision for your future, retirement is a worthy goal to work towards, and one you can achieve. So, don’t let financial fears, either future or present, hold you back from getting started — because the sooner you start, the less you’ll have to worry later. By thinking realistically about your lifestyle, mapping out achievable benchmarks, and taking advantage of all the savings tools around you, you can set yourself on a path toward a bucket-list topping retirement.
Prepare for your retirement by opening an IRA with Ally Invest.