Couple planning for retirement

How Much to Save for Retirement

Louis DeNicola

Building your retirement savings is an important part of preparing for your future. And many people include saving for retirement as one of their top financial priorities. However, it can be challenging to know how much to save for retirement, partially because the answer can depend on your lifestyle, plans for retirement and current savings.

How Much Should I Save for Retirement?

Many factors can impact how much you need to save for retirement. A retirement calculator can help you narrow in on the specific numbers. But first, you may want to try and determine:

  • How much you have in savings and investments.
  • Your current monthly savings rate.
  • The expected return on your investments.
  • When you plan to retire and how long you expect to live.
  • When you plan on starting to collect Social Security.
  • The income streams you’ll have during retirement.

Other factors can also be important. For instance, how much money do you need to retire comfortably? The answer can largely depend on where you plan on living. After all, if you relocate to an area with a lower cost of living, your savings could stretch much further.

Major one-time inflows or outflows of money — such as selling a home, paying for a child or grandchild’s college education or buying an RV — can also impact your savings plan.

It’s best to have exact numbers but don’t let uncertainty stop you. Working with approximations is better than putting off retirement planning altogether.

Estimate Your Future Income Needs

Retirement income can come from different sources, including Social Security, pensions, retirement accounts, investments and rental properties. In general, you can expect to need about 70% to 80% of your pre-retirement income during retirement.

Many people need less income during retirement because they’re paying less tax on the income, and their expenses decrease. However, your needs can also depend on how much debt you have and the lifestyle you expect.

Some retirees also experience a “retirement spending smile,” which refers to their spending curve. Spending is at its highest during the initial years when people often travel and start new hobbies. It drops as retirees slow down but then ticks up in later years as healthcare costs rise.

How much money do you need to retire comfortably

Be Familiar with Your Work Retirement Plan

One of the most common ways to save for retirement is by using employer-sponsored plans, like the 401k. If your employer offers a retirement plan, get familiar with the investment options and whether the employer offers a contribution match.

How Much Should I Have in My 401k

Employer matches can help quickly increase your 401k savings and limit how much money you need to deduct from your paycheck. For example, if your employer matches your contributions dollar-for-dollar and you want to save 15% of your income, you might only need to contribute 7.5%, and your employer will contribute the other half.

There are limitations on how much you can contribute to a 401k each year, although these increase once you turn 50 to help you catch up on building retirement funds. If you have more money to set aside, you can invest in a tax-advantaged individual retirement account (IRA).

Some people use alternative investment options in addition to or instead of retirement accounts. These can include starting or growing a business, purchasing and renting property and buying tax-free municipal bonds.

Use a Retirement Calculator

Once you’ve figured out a few details about your finances and expected lifestyle, you can use a retirement calculator to narrow in on how much you need to save.

Retirement calculators can range from simplistic to almost overwhelmingly complex. Generally, they’ll show you how much income you’ll have during retirement based on your current and projected savings. Some will also let you start with a simple estimate and then see how different scenarios can impact your retirement.

You may need to try a few retirement calculators until you find one you like using. Some good options include calculators from SmartAssetPersonal Capital, and Financial Mentor.

Adjust When Necessary

Once you determine how much of your income you should be saving for retirement, setting your contributions on autopilot can be helpful. Consider doing this by having the money automatically deducted from your pay and put into your employer-sponsored retirement plan. You can also set up automatic contributions to an IRA.

You don’t necessarily need to manage your retirement savings on a weekly or monthly basis. But you do want to check in occasionally. Review your investments at least once a year to see if you want to make any changes. If you actively pick stocks or funds, also take this time to rebalance your portfolio.

You may also want to review your retirement plan after a major life event, such as having a child, getting married, losing a job or experiencing a health scare. These can all impact your finances today and plans for retirement.

How Much Should I Be Saving?

If you want some general guidelines for how much you should have in your 401k and other retirement accounts, financial advisers and institutions sometimes share recommendations. The figures are often based on your annual income and age.

How Much Should I Save For Retirement

These general recommendations often aren’t as useful as a retirement calculator. Calculators can help you figure out how much you should save each month to meet your retirement goals. Or, if you’re short, how that will impact your retirement years. And the more advanced calculators can incorporate your personal circumstances to create more accurate predictions.

Consider how someone who goes straight from college to medical school may graduate in their late 20s with six figures of debt rather than much (if any) retirement savings. It might look like they’re off track based on general recommendations. But they’re also in a position to land a high-paying job that lets them catch up on their savings.

Or, someone might have a lot in retirement savings but also be drowning in high-interest credit card debt. It might appear like they’re “on track” at first glance. But a closer look at their finances may reveal their net worth is dropping as the interest accrues.

Commons Rules of Thumb

Similar to the general guides for how much to save, general guidelines aren’t personalized. But they can give you a broad sense of direction.

For instance, if you’re wondering what percentage of your income should go to retirement, a general rule of thumb is to set aside 10% to 15% of your income for retirement. The amount includes your contribution and your employer match, if you receive one. However, it also assumes you’re starting to save for retirement in your 20s.

There are other rules of thumb for retirement savings and investing as well. For instance, one says your age should match how much of your portfolio you invest in bonds — e.g., 70% in bonds once you turn 70. Generally, bonds are less risky than stocks, so this means your portfolio will have less risk as you age. (An easy approach may be to invest in a target-date mutual fund, which automatically makes these types of adjustments over time.)

Another is the 4% rule, which says your retirement savings should last at least 30 years if you withdraw 4% of your retirement savings the first year and 4% plus inflation going forward. But the rule assumes you’re invested fifty-fifty in stocks and bonds.

Rules of thumb can be helpful starting points. But make sure you dig a little deeper and create a personalized retirement plan based on your unique situation.

Savings and Retirement Accounts

Also, rather than solely focusing on how much you should have in a 401k, learn about the pros and cons of different types of accounts.

A 401k is often the best first option if you receive an employer match, at least until you contribute enough to get the full match. However, you have to choose from the investment options in your 401k.

If you don’t receive a match or already maxed out the match, contributing to a Roth or traditional IRA might make sense. With an IRA, you have more investment options and may be able to save money by choosing low-cost funds. Also, management fees may be lower for an IRA than 401k.

You could also look for other tax-advantaged accounts. Health savings accounts (HSAs) are a popular option that allows you to set aside and invest money for future medical expenses. You need to have a high-deductible health plan to qualify, and there are low annual contribution limits. But HSAs also offer a triple-tax benefit. Contributions are tax deductible, investments can grow tax-free and you don’t pay taxes on withdrawals if you use the funds for eligible medical expenses.

Building Savings and Delaying Retirement

Many people start saving for retirement late or don’t earn enough to cover their bills and fully fund a retirement account. However, you can set yourself up for a comfortable retirement even if you have less than the ideal or got a late start.

  • Get started right away. Even if you aren’t close to having the suggested retirement savings or can only put aside a little money each month, the sooner you start, the better.
  • Increase your savings rate over time. You likely won’t notice if you have 1% less money to spend. But adding 1% to your contribution rate each year can make a big difference over time.
  • Contribute part of every raise. If you get a new job or raise that pays 10% more, you could put 5% toward your retirement and still have more money to spend.
  • Consider delaying retirement. The extra income can help build your retirement savings, and you can receive more in Social Security if you wait to start collecting benefits.

Rather than delaying retirement altogether, you could also look for ways to transition into retirement. Having a part-time job or consulting work can be a good way to stay active and make a little money. It’s becoming a popular option, even among people who don’t need the extra income.

Find Ways to Save Money

How Much To Save for Retirement

If you’re feeling behind on your retirement goals, living a more frugal lifestyle could help you get on track. Saving money can impact how much you can spend today — and how much you’ll need to have during retirement.

Also, take the time to use a detailed retirement calculator to see the impact of small changes. Many people don’t have the recommended amounts. But they’re able to save up for and enjoy retirement by making adjustments to their lifestyle.

Is Supplemental Insurance Right for You?

Saving for retirement is only one component of supporting your financial wellness.

This informational material shall not be considered financial advice. The Hartford assumes no responsibility for any financial, investment, or tax-related decisions. Those seeking resolution of specific financial, legal, tax, or business issues, questions, or concerns regarding this topic should consult their own financial, investment, tax, legal, or other business consultants, advisors, or other professionals. 

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