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How Much Should You Save for Retirement?

Published October 10, 2019

8 minute read

By Jim Greene

Economists have been sounding alarm bells about the precarity of social security and pension plans for years now. The uncertainty surrounding old-age payouts is part of the reason financial planners tend to stress the importance of saving for retirement. But how much is enough? And even more importantly, how can you reach your savings goals without upending your regular budget? It’s difficult to strike a balance between budgeting for the present while also saving enough for your future. But with some careful planning and disciplined saving, it can be accomplished. How much money do you need to retire? Let’s break this down.

General Rules of Thumb

Financial planning experts often cite two common rules of thumb. One offers a ballpark figure of how much money you will need to live out your life in comfort. The other provides a general blueprint for step-by-step saving to reach specific goals.

To figure out how much money you’ll need to maintain a comfortable retirement, look at your pre-retirement (and pre-tax) annual income. The rule of thumb is that you will need to generate 80% to 85% of that total to maintain your current lifestyle. Thus, your personal savings will need to bridge the gap between that figure and whatever amount you expect to receive from a pension or social security.

To keep the numbers easy, let’s say you make $100,000 a year. When you retire, you calculate that you’ll be entitled to $40,000 a year in pension and/or social security benefits. That means you’ll need about $85,000 a year to maintain your current lifestyle. According to this rule of thumb, you’ll need to come up with $45,000 a year on top of your retirement benefits. Assuming you’ll retire at 65 and life to the ripe old age of 95, your nest egg will need to be roughly $1.35 million to see it out.

The other rule of thumb says you should stash away 10% to 15% of your annual pre-tax income for your retirement plan. If you stick to your plan and never miss making a scheduled contribution, the magic of compound interest will make the numbers work. You just have to start saving as early as possible.

Start Saving as Early as Possible

Since compound interest is such a powerful financial accelerator, it’s a huge benefit to start saving as early as possible. The ballpark figure of 10% to 15% of your pre-tax income applies if you begin while you’re in your 20s. It rises sharply if you wait until your 30s for 40s to start making contributions. Truthfully, even 5% is better than nothing, but it probably won’t be enough unless you up your contributions as you get older.

This CNN Money guide offers a formula to help you calculate your savings needs, no matter what stage of life you’re currently at. It recommends setting aside $15 to $20 in retirement savings for every dollar you’ll need to bridge the gap between your pension benefits and your annual income needs.

For instance, let’s say you need $50,000 per year to meet your lifestyle needs. Unfortunately, you’re only going to get $20,000 per year in pension benefits. So you need to make up an annual gap of $30,000. Multiply that by 15 or 20 times (we used 20) to calculate that your retirement plan needs $600,000 more. Then annualize that figure by determining how many more working years you have left to tally up your annual savings requirements. If you’re 45 and you want to retire at 65 with $600,000 in savings, you’ll need to squirrel away $30,000 a year (or $2,500 a month) to get there.

Use Calculators to Plan and Track Your Savings

Many people get “sticker shock” when they first see how much money they’ll have to save to meet their retirement goals. The numbers can certainly seem daunting, especially if you’ve been putting off saving for retirement. However, remember that retirement savings plans deliver excellent interest rates and tax benefits that protect your money and help it grow quickly.

To that end, we recommend using a retirement savings calculator to guide your financial planning. These online tools take a myriad of influential factors into account, including interest rates, inflation, your salary, and your expected salary increases over time. Take some time to plug in the numbers. Chances are you’ll find the figures a little more manageable than they seemed when you did raw, basic calculations.


Tips to Maximize Your Retirement Portfolio

If you start saving early, you’ll need to contribute less money per month to reach your retirement goals. If that ship has already sailed, consider these strategies to accelerate the value of your retirement portfolio.

You can find other ideas and investment opportunities that match your financial situation and risk profile by speaking to a licensed financial adviser.

Use Tax Advantaged Accounts

When building a nest egg, it’s important to use available tax advantaged accounts. They will limit the taxes you have to pay and help maximize your returns and savings. Whether it’s a 401(k) plan that is tax deferred until savings are withdrawn or a Roth IRA account that allows people to save money tax free, putting money in these types of funds is important to building long-term wealth.

Investments held outside tax advantaged accounts are subject to capital gains taxes and income tax. These taxes will erode a part of your savings over time. By setting aside money in a 401(k) or Roth IRA, you can ensure that you save the maximum amount. Also be sure to take advantage of any retirement program offered at your place of work, whether it’s a matching contribution in a 401(k) or a traditional defined benefit pension.

Invest In Equities When Young

Young investors with a long-term time horizon should be invested in equities or stocks. Stocks offer the greatest potential for gains over time. The rate of return on stocks is much higher than on more conservative investment vehicles, such as bonds. The risks are also greater with stocks. However, they tend to average out over a decades.

A number of investment advisors recommend that anyone under the age of 40 have 80% of their retirement money invested in stocks. This is done to maximize the growth of a portfolio. Should the stock market turn negative or experience a prolonged down period, young investors will still have time to recover or move their money into more predictable investments.

Adjust Your Portfolio As You Get Older

Chasing growth is fine when you’re young. However, you should adjust your portfolio as you get older and closer to retirement. Once you pass 50, there’s less time for your savings to recover from a prolonged market recession or a couple particular bad stock picks. You should transition your savings into safer investments, to keep it safe when you’ll need it the most.

While bonds tend to pay lower interest than stocks (typically 1-to-3%) the interest is guaranteed and predictable. By the time someone is five years out from retirement, half their portfolio (50%) should be in bonds and the other half should be in stocks. Once retired, 80% of a nest egg should be in bonds and only about 20% in stocks.

Consider The Lifestyle You Want In Retirement

Retirement planning should start with considering the lifestyle you’ll want to live once you are no longer working. Will you want to travel a lot? Or will you be content to garden at home? Are you going to want to buy expensive toys such as a boat or sports car? Or will you be driving a second-hand car that you have owned for years?

Determining the lifestyle you want to live in retirement will give you an idea of how much money you will need on a monthly basis. This can help you to plan your savings rate while still working. If you feel like you’ll need $100,000 a year of retirement income, then you will likely have to save close to $2 million for retirement. However, if you calculate that you will only need about $60,000 a year once retired, your savings goal will be closer to $1 million.


Get Out Of Debt

Perhaps just as important as saving for retirement, you need to get out of debt before you leave the workforce. This can include paying off your house, cottage, car loans, lines of credit, or high-interest credit cards. Having to service that debt in retirement can quickly eat up the income you receive from your savings. You may find yourself strapped for cash, now that you’re on a fixed income.

In addition to prioritizing saving for retirement, you should also concentrate on paying off their debts. It’s usually best to start with the debt that has the highest interest rate. While your mortgage is typically considered a “good debt” (as long as it’s not underwater), you have options if it becomes a struggle to pay after retirement. You could sell it and downsize to a smaller property. That could reduce your mortgage payment by a lot (or remove it altogether, depending on the math). However you do it, getting out of debt should be a top priority of all retirees.

Plan For Taxes

The taxman does not disappear just because you are retired. Everyone has to pay taxes on their retirement income. You should be prepared to pay a certain percentage to the Internal Revenue Service (IRS). You may also still owe state taxes as well. The last thing you want to do is run afoul of the IRS once you’re retired.

You should also be aware that there are taxes levied on capital gains, home sales, and many other financial transactions that might occur during retirement. When planning for your retirement income, it’s important to factor in the potential tax implications. Also be aware that people managing their own money in retirement are responsible for paying their own taxes. So plan carefully.

Remember Estate Planning

When planning for retirement, it’s important to develop (or update) your estate planning. Deciding what you want to do with your money and how you want to distribute your assets once you die is important. It’s advisable to update your will and power of attorney as you enter retirement. Then keep it updated regularly as you age.

Choose an executor who will follow your wishes and ensure your directions are carried out appropriately. Once again, there could be tax implications after you die. Although you’ll be gone, these can be unexpected and stressful on the loved ones you left behind. You should make yourself aware of the potential tax liabilities and plan accordingly. If it’s confusing, consult a qualified and reputable estate planner or tax lawyer. They can help ensure that your estate is legally enforceable once you die.

The Bottom Line

Try not to panic about your retirement, even if you haven’t started saving at all. There are many things you can do post-retirement to help make ends meet. Assuming you’ve built up a solid amount of equity in your home, you can take advantage of refinancing programs for retirees. You can also downsize to a smaller home that’s also easier to maintain. Holding a part-time job is also highly beneficial for older people, as it keeps you socially active — which has many physical and mental health benefits.

Jim Greene


Jim Greene is a freelance writer based in the Toronto, Canada area. He has been writing professionally since 2001 and has an extensive professional background in consumer research, personal finance and economics.

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