How Much Do I Need To Retire?

While every American has different ideas of what they want their retirement to look like, you should consider a few savings benchmarks to see whether you're on the right track. A popular approach is to save enough to live on 80% of your pre-retirement income. By saving money like this, you can maintain your current lifestyle with a few strategic changes to your spending habits.

You’ll need to visualize your desired lifestyle and establish your specific needs and financial goals, including how much you want to spend each year in retirement. How much you’ll need to retire will also depend on whether you're considering early retirement. A retiree in their mid-40s will likely need more money than a retiree in their mid-60s.

How Do I Set A Goal For Retirement Savings?

There’s no universal answer to this question – the amount of money you need depends on your unique financial circumstances and retirement goals.

To start, ask yourself these retirement planning questions:

• When would you like to retire?
• Will you work part time?
• Will your expenses increase or decrease after retirement?
• What income sources will you have after retirement?
• Do you plan on relocating to an area with a lower cost of living?
• How long do you expect to be retired?

Saving For Different Post-Retirement Lifestyles

Consider this example to help understand the need for a customized retirement plan. Imagine you and a friend are 35 years old. You both want to retire in 20 years, and each of you has a $100,000 retirement fund.

You want to travel more when you retire. When you add travel to your other expected expenses, you calculate that you’ll likely spend around $85,000 a year. Meanwhile, your friend expects to downsize, move to an area with a lower cost of living and spend $40,000 a year in retirement.

You’ll need to save more because your estimated retirement expenses are higher than your friend’s.

Retirement Goals By Age

Some financial experts recommend saving a certain percentage of your salary based on your income and age. Your age has a significant impact on the amount you’ll need to save for retirement.

Starting to save for retirement at a young age with even a small percentage of your income can help you reach your retirement goals. The magic of compound interest will grow your retirement nest egg and bolster your sense of long-term security.

Many experts recommend saving at least 15% of your gross salary and investing in assets that may have higher growth potential, like stocks, by age 25. Generally this would include taking advantage of retirement funds with tax benefits that help you save faster, like a 401(k) or individual retirement account (IRA).

Fidelity provides a series of multipliers that you might strive to have saved based on your current age and income in order to retire at age 67 through 93. They assume a retirement target that will replace 45% of your pre-retirement income, excluding any pensions, and a 15% savings rate moving forward. It also does not account for social security, which may provide additional funds.

• At age 30: save 1x your salary
• At age 40: save 3x your salary
• At age 50: save 6x your salary
• At age 60: save 8x your salary

To help make the numbers more concrete, we’ve included a table showing median weekly earnings at different ages, according to the Bureau of Labor Statistics, converted into annual income, as well as the recommended retirement savings based on Fidelity’s multiplier. The Median Annual Income has been calculated based on 52 weeks per year.

Source: Bureau of Labor Statistics, 4^th quarter 2023 averages

Keep in mind that these numbers are only guidelines and may change based on your current age, income, desired lifestyle for retirement, health care costs and life expectancy. 

Other Retirement Investment Strategies

Financial advisors recommend several retirement saving strategies. Each recommendation has pros and cons you should examine. To begin, let’s explore three common guidelines.

Percentage Of Your Salary

Some experts recommend saving at least 70% – 80% of your pre-retirement income. So, if you made $100,000 a year before retiring, you should plan on saving $70,000 – $80,000 for each year in retirement.

This investment strategy is easy to calculate and provides a good estimate of how much you need to save for retirement.

Accounting For Inflation

But there are disadvantages to only using a percentage of your salary to calculate how much you need to save to retire comfortably. A major downside is that it doesn’t account for inflation. You must adjust your salary for inflation to better estimate how much you’ll need to retire. You can use an inflation calculator or the Rule of 72 formula to adjust for inflation.

Divide 72 by the average inflation rate to calculate the number of years it takes to double your cost of living. For example, if inflation is at 3%, it’ll take 24 years for your cost of living to double.

The Rule of 72 is a good guideline, but you’ll get more accurate results with an inflation calculator.

Another downside to using a percentage-based strategy is that it’s hard to know how much money you’ll need because there’s no way to predict how long your retirement will last. However, you can still use the strategy as a guideline to help you determine what percentage of your income should be allocated to retirement and savings accounts.

The 4% Rule

The 4% Rule is a guideline for withdrawing money from your retirement assets so your funds can last at least 30 years. According to the rule, you make a 4% withdrawal from your accounts in the first year and adjust your withdrawal rate for inflation over the following years.

Let’s say you plan on living on $40,000 a year during retirement. According to the 4% rule, you’d need $1,000,000 to retire, or 25 times your annual expenses. And in your first year of retirement, you’d withdraw $40,000.

If inflation were 4% in year one, you’d withdraw $41,600 the second year ($40,000 X 0.04) + $40,000 = $41,600.

Concerns About The 4% Rule

You may have seen the 4% figure floating around, especially among members of the FIRE movement (Financial Independence, Retire Early). That’s because one of the biggest fears (and risks) for retirees is their funds running out.

The 4% Rule is easy to follow, but it has disadvantages. For example, withdrawing 4% each year when you don’t have enough saved may cause you to run out of money faster. And the rule doesn’t account for market fluctuations. Further, the 4% Rule assumes a 30-year retirement. Increase your life expectancy or plan to retire early, and you’ll need to have more saved for the 4% Rule to work.

Reasons To Wait To Retire

If you want to retire early, there are strategies you apply to make it happen. But many future retirees decide to wait for a few reasons.

Retirement Fund Income

If you wait until you’re 59½ years old to withdraw money from a traditional or Roth 401(k) or individual retirement account (IRA), you won’t pay the 10% early withdrawal penalty. If using a Traditional 401(k) or IRA, your contributions and earnings will be taxed when you withdraw because your contributions were made using pretax dollars. If using a Roth 401(k) or IRA, your contributions and earnings will not be taxed, because you contributed to the account using post-tax income.

Waiting also allows investors age 50 and up to make catch-up contributions to certain retirement funds, including IRAs, 403(b) and 401(k) plans.

Social Security Income

Anyone born between 1943 and 1954 can receive 100% of their Social Security benefits if they wait until their full retirement age of 66. For anyone born after 1954, the full retirement age is 67. While you can start receiving Social Security benefits at age 62, it’s worth noting that the longer you wait, the more your benefits (like Social Security income) increase – up to 132% if you delay retirement up to age 70.

Pension Income

If you expect to receive a pension, waiting could increase the percentage of your salary you receive during retirement. The amount will likely depend on certain factors, like length of employment and income. Contact your benefits department for specifics on your pension.

FAQs: Retirement Financial Goals

Here are answers to questions Americans often ask about what they need to save for retirement.

How long will my retirement savings last?

How long your retirement savings will last depend on how much you withdraw every year and your investment returns. Using the 4% Rule discussed above, you can expect your investments to last you approximately 30 years. If you are flexible to a lower withdrawal rate, your funds will last longer. If you want to withdraw at a higher rate, you will use up your investment funds sooner.

How can I make my retirement savings last longer?

In addition to employing the right investment strategy for life after work, consider downsizing and reevaluating your lifestyle. Some retirees even continue to work part time or develop other streams of passive income to assist in funding their retirement, like purchasing a rental property, for example.

The Bottom Line: Consider Your Lifestyle And Resources To Grow Your Retirement Nest Egg

Saving 70% – 80% of your pre-retirement earnings can help you maintain a similar lifestyle in retirement, after adjusting for inflation. You can use the 4% Rule for withdrawing money from your retirement assets. And the percentage-based income strategy can help you decide how much you need to save based on age.

No matter which strategy you choose, the sooner you start, the quicker your retirement nest egg will grow. You can always adjust your savings rate if you’re allocating too much toward your retirement accounts to meet your present expenses or needs.

Need help tracking your retirement investments? Download the Rocket Money℠ app to see how your retirement strategy is working at a glance.