How Much to Save for Retirement? How to Know the Answer

In this article, you’ll learn how to create a retirement budget, determine your income needs, and calculate how much to save for retirement.

How Much to Save for Retirement? How to Know the Answer
Updated May 13, 2024
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For many of us, the goal of retirement seems so far away that it is hard to grasp. We know we want to retire but don't know what we need to get there. That's why it is so important to put some time into retirement planning and calculate how much to save in a real-world way. This way you can track your progress against that savings goal and know whether you're saving enough in your retirement accounts.

Although there are some general rules of thumb when it comes to retirement saving, we’re about to show you how to actually calculate whether you're saving enough for retirement to live the lifestyle you dream of. Plus, we'll share some milestones designed to track your progress toward your retirement savings goals.

In this article

Calculate your retirement budget

Before calculating how much you need to save, you should think about what retirement looks like for you. Although some of your living expenses will go down (e.g., commuting, workplace lunches), others may increase (e.g., travel, hobbies, medical).

Consider the lifestyle you want to have in retirement. Will you be traveling the world on your retirement budget or visiting friends and family? Are there hobbies you never had time for but now want to try? Or will you be going back to school to learn about what interests you? Think about how you spend your money today and how that might change in the future.

Now, grab a notebook or open up a new spreadsheet and write down your estimated monthly budgets. Make a column for the spending category, your current budget in that spending category, and your estimated retirement budget. Writing down your current budget will help you choose a more realistic goal for your retirement years.

Here are some broad categories to include in your budget, but feel free to add more based on your personal finances and retirement goals:

  • Housing
  • Utilities
  • Groceries and dining
  • Transportation
  • Healthcare
  • Personal insurance
  • Personal care
  • Family care
  • Travel and entertainment
  • Loan payments
  • Charity

Once you have all the numbers written down, total up the numbers to get your monthly retirement expenses. Don't forget that inflation will also cause these expenses to increase over time. Although historical inflation rates hover around 3%, current inflation rates are closer to 2%. At these rates, your expenses could double every 20 to 30 years.

One particular item that can derail your retirement budget is debt. Examples include a mortgage, credit card balances, auto loans, and student loans. Will these be paid off before you retire or will you still be making payments out of your retirement income? Consider refinancing credit card debt or doing a student loan refinance to accelerate paying off your debt so it’s simply not part of your retirement budget.

Calculate your retirement distributions

Next, we need to calculate what guaranteed annual income you'll receive in retirement from Social Security, pensions, and other income sources. Every dollar of income you receive from these sources reduces your need to save and invest for retirement.

Social Security benefits

Americans born after 1960 can start receiving full Social Security benefits at age 67. However, it pays to delay receiving them because your benefits increase by 8% for every year you wait. If you wait until age 70, when you must start receiving benefits, you'll max out your benefits at 124% of your standard monthly Social Security income.

Social Security benefits are calculated based on the wages you’ve earned, the number of years you worked, and the retirement age when you start receiving them. The Social Security Administration offers several retirement calculators to help you determine your expected benefits.

Additionally, you can create a my Social Security account to view your earnings history and estimates of your retirement, disability, and survivor's benefits. When reviewing your earnings history, if you see a mistake, address it right away. It could make a difference in your retirement benefits.

Pension benefits

Although pensions are not as common as they used to be, some readers may still qualify for one. Pensions are often based on your years of service, when you retire, and your wages. To determine your projected pension benefits, contact your plan administrator or someone in human resources.

Other sources of income

Other sources of retirement income include rental income from properties, business income, and part-time employment. Owning rental properties or businesses can provide monthly income in retirement that reduces your need to save and invest.

Some people continue to work in retirement to stay active because they love their job, they haven't saved enough, or they’ve found a part-time job with health insurance. Whatever your reason for working, having this income in retirement means you don't have to save as much. However, keep in mind that our bodies may not be capable of certain types of work as we get older, even if our minds remain sharp.

Now, turn back to your notebook or spreadsheet and create a section for your sources of income. Write down your estimated monthly income from each source:

  • Social Security benefits
  • Pensions
  • After-tax income from continued work
  • Other sources of expected income

Once you have all the numbers written down, total them up to get your estimated monthly retirement income.

Calculate how much to save for retirement

Next, you will subtract your retirement expenses from your retirement income. You'll either end up with a positive or a negative number. A positive number means your retirement income covers all your projected expenses and leaves you with a surplus to save, spend, or invest. If you have a negative number, you need to save and invest to meet that need.

Examples #1 #2 #3
Retirement income $3,000 $1,000 $4,000
Retirement expenses $5,000 $4,000 $3,500
Monthly need $2,000 $3,000 None

Once you calculate how much money you'll need each month to cover your expenses, multiply it by 12 to annualize the number. Following example #2, a $3,000 monthly need equates to needing $36,000 per year. Then, divide that by 4% to calculate the amount of money you’ll need to have in your retirement fund in order to withdraw that amount per year. In this example, that comes out to a retirement savings goal of $900,000.

Examples #1 #2 #3
Monthly need $2,000 $3,000 None
Annual need $24,000 $26,000 None
4% Rule $600,000 $900,000 N/A

We're using the 4% rule for this calculation. This rule states that you have a high probability of your money lasting a 30-year retirement if you withdraw 4% of your starting retirement balance and then adjust it for inflation each year.

So now you have a specific number to save for. But when you save toward your retirement goal, it is actually done with a combination of saving and investing. Saving is focused on short-term needs, like an emergency fund and daily cash flow, whereas investing is focused on a longer time horizon. We'll discuss these nuances and how you might allocate your money in the next sections.

How much to save

Saving and investing are not the same thing. You save for short-term expenses with money that is safe, secure, and easily accessible. In other words, you want to make sure this money is there when you need it. This money may sit in your checking account, a high-yield savings account, or a short-term certificate of deposit (CD).

When you are working, the common rule of thumb is to have three-to-six months of expenses in your emergency fund. This will help you cover most unexpected expenses without going into debt. In retirement, this emergency fund should be larger because you won't have your normal paycheck to rebuild your savings quickly. Some experts recommend retirees keep one-to-three years of anticipated withdrawals in cash so you can ride out any stock market volatility. Needing to sell an investment when it is down in value can be a costly retirement mistake.

Using the numbers you arrived at above for your monthly retirement need, you can calculate the emergency fund amount you should have in retirement. For example, if your monthly need from your retirement fund is $3,000, you should have an emergency fund somewhere between $36,000 to $108,000 in cash.

Money set aside in cash will not earn the same types of returns as your investments, but that is OK. You are exchanging potentially higher returns for safety and security that will be there for you when you need it most. That said, there are still potentially better places to keep this money.

Instead of keeping this money in your checking account or in a low-interest savings account at your bank, consider other options:

  • Earn a better rate by finding a high-yield online savings account.
  • Build a CD ladder with CDs maturing every six months to a year.
  • Contribute to a Health Savings Account (HSA) for tax-free growth and withdrawals for qualified medical expenses

How much to invest

Setting aside money in a savings account is good for short-term expenses, but long-term dollars should be invested to earn a higher rate of return. This continues to build your nest egg and overcome inflation.

Investing is a powerful way to save for retirement. Over the past 60 years, the average stock market returns have been roughly 8%. These investment returns far outpace the average inflation rate of 3%. With your returns exceeding the rate of inflation, the value of your account will be worth more in the future than it is today, both in real dollars and when adjusting for inflation.

The power of investing is multiplied when using tax-advantaged accounts that allow your accounts to grow without being subject to taxation until you make withdrawals. Some account types provide income tax deductions when you make contributions, like a 401(k) or traditional individual retirement account (IRA). Others provide tax-free withdrawals in retirement, like a Roth IRA. The one that works best for you depends on your goals, income level, and access to company retirement plans.

To determine how to invest money to reach your goals, review your retirement needs from above. Because your cash savings is meant to cover short-term needs, it does not address the annualized need amount that you arrived at using the 4% rule. So if you determined that you need $900,000 to comfortably retire, that is also the amount you need to grow in your investments.

The 4% rule suggests you have a high likelihood of your nest egg lasting for 30 years if you keep your money invested in a broad array of stocks, withdraw 4% of your beginning balance, and then adjust your withdrawals for inflation every year.

Which accounts to invest in

Savvy investors utilize a variety of investment accounts to take advantage of their tax benefits today and in retirement. People with access to a traditional 401(k) can contribute pre-tax dollars up to $23,000 if they are under 50, or $30,500 if they are 50 or older for the tax year 2024. You can also contribute after-tax dollars to a Roth IRA up to $7,000 for the year 2024, or $8,000 if they're 50 or older.

These retirement contributions will go a long way toward reaching your retirement goals. Roth IRAs provide tax-free withdrawals in retirement, and 401(k) accounts can provide automatic contributions from your paycheck with the potential for an employer match.

Once you've hit the 401(k) contribution limits for any company retirement plans, choosing a brokerage account to invest through is the next step. You can open an account with established investment companies like Fidelity or Vanguard, or go the route of using one of the best online brokers.

In a brokerage account, you can put your money in a wide variety of investments, such as individual stocks, mutual funds, exchange-traded funds (ETFs), or even alternative investments like real estate. There are no limits to how much you can invest each year, and money can be withdrawn from brokerage accounts at any time. Every time you withdraw money from your brokerage account, you record the profit or loss and pay the taxes on the capital gains when you file your taxes each year.

Many of the best investment apps make buying shares of stocks simple and affordable. You no longer have to save up to buy full shares of your favorite companies. Instead, you can buy fractional shares based on whatever amount you have available to invest.

So are you saving enough for retirement?

When you calculate your retirement goal, that number can seem overwhelming. This is especially true if you're just starting out or feel your current savings rate isn't where it should be.

The key is to start small and grow your contributions over time. The sooner you begin, the longer your contributions have to grow through the magic of compound interest. If your company offers a match on your 401(k) contributions, max out that free money first before opening up a traditional or Roth IRA. When you receive a promotion or your annual raise, increase your contributions with all or a part of that money to build momentum.

And, as with most things in life, it helps to have milestones to measure progress toward your retirement goal. Here are a couple of examples of how much you should have saved by various ages on your path to retirement. These are multipliers of your current income based on the recommendations of two large investment firms.

Fidelity T. Rowe Price
Age 35 2X income 1X income
Age 40 3X income 2X income
Age 45 4X income 3X income
Age 50 6X income 5X income
Age 55 7X income 7X income
Age 60 8X income 9X income
Retirement 10X income

*age 67

11X income

*age 65

For example, if you make $30,000 in annual income at the age of 35, then Fidelity suggests you have $60,000 in your retirement savings accounts. If your current retirement savings don't match these milestones, don't worry. As you can see, even large financial services companies differ about the right way to save and invest for retirement.

Keep these milestones in mind as you continue to save. With continued contributions to your retirement and brokerage accounts, plus market returns, you may reach these goals quicker than you realize.

Bottom line

Now that you understand the key components of saving for retirement, it is easier to develop a personalized plan. Saving for retirement not only helps you achieve your goals, but it is also an integral piece of your tax planning strategy to reduce taxes today, tomorrow, and in retirement. As you develop your plan, it might make sense to schedule an appointment with a financial advisor and a tax professional to answer questions or ask for their advice.

If your goals seem daunting right now, that's normal. The most important step you can take today is to start saving. Over time, you'll be able to increase your contributions as you get raises, reduce expenses, or receive found money from tax refunds, contest winnings, or even sign-up bonuses from credit cards.

As the saying goes, "The best time to start investing was 10 years ago. The second best time is now."


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Author Details

Lee Huffman

Lee Huffman is a former financial planner and corporate finance manager who now writes about early retirement, credit cards, travel, insurance, and other personal finance topics. He enjoys showing people how to travel more, spend less, and live better. When Lee is not getting his passport stamped around the world, he's researching methods to earn more miles and points toward his next vacation.