Retirement gurus will have different opinions on how much you should save for retirement. The answer to this question varies and is impacted by factors like average income and future retirees’ lifestyle goals once retired. 

Since not all of us consider things that much in advance and start calculating retirement goals as soon as we start working, it is a good idea to calculate this number based on your current age.

Figuring out your target retirement income

For most people, 15% of annual income alongside employer contributions should be an ideal savings goal. Keep in mind that this only goes if you start saving for retirement at age 25 and continue saving until age 67. This approach should enable you to secure sufficient money to support your existing lifestyle post-retirement.

If you are unclear about where to start, we recommend you look at the typical retirement spending pattern of the average person. In general, most people will require somewhere between 55% and 80% of their pre-retirement monthly income to meet their standard of living during retirement.

Top earners often need additional assets along with their income because Social Security will only provide a smaller portion of their earnings in retirement. 

For those who want to retire around 65, we recommend saving assets equal to 7 to 13 ½ times their pre-retirement incomes.

Figuring out when you want to retire

Usually, people start to consider retiring during their 50s and early 60s. The average retirement age for men is typically 64, while women work until age 62 on average. 

The full retirement age for Social Security benefits in 2022 is 67 years for people born in 1960 or later and 66 years for those born between 1943 and 1959. However, your monthly benefit from Social Security may be 32% greater at age 70 than when you just hit the target retirement age. Still, this would mean that you would have to work 3 to 4 years longer to get that benefit.

The ideal retirement age depends on your retirement assets, health benefits, and social security, but is also tied to your goals. 

Conservative assessment: 15% of your pre-tax income starting at age 25 

According to projections from Fidelity Investments, saving 15% every year from the age of 25 to 67 should give you a comfortable retirement. Your target savings rate can be less if you are eligible to receive a pension. 

After analyzing a lot of data related to national spending, the experts at Fidelity Investments realized that the average person needs between 55% and 80% of their pre-retirement income to sustain their lifestyle in retirement.

A part of that sum will likely come through Social Security. Furthermore, we found that the average individual will need to obtain roughly 45% of their retirement income (before taxes) from savings.

The average Social Security retirement benefits amount to approximately $1,620 per month. Most people would struggle to make ends meet with this income alone. Sadly, many Americans are not saving enough for retirement and this usually results in a significant downgrade in lifestyle after they retire.

Suppose your income increases by 1.5% annually (after inflation) till age 67, and at that point, you are ready to retire. Approximately 45% of your retirement income must come from your savings to maintain the same lifestyle as before retirement.

In addition, set aside 15% of your income because your employer will match 5% of your 401(k) contributions.

Will 15% be sufficient? Yes, if you start doing it at 25 and reach full retirement age before you decide to stop working. If these conditions are not met you’ll have to adjust your retirement savings. 

The “25% of gross salary” approach

An alternative approach to the predictive calculation of this type suggests that you should start saving 25% of your annual gross income in your 20s. This approach also incorporates other forms of retirement funds besides employer contributions and 401ks. 

We understand that 25% may seem a lot but we are discussing ways to ensure a safe and comfortable retirement.

This approach should enable you to reach financial independence in 30 years. If your average savings rate remains consistent, your results may look like this:

  • 35 years - Yearly income x 2
  • 40 years - Yearly income x 3

  • 45 years - Yearly income x 4

  • 50 years - Yearly income x 5

  • 55 years - Yearly income x 6

  • 60 years - Yearly income x 7

  • 65 years - Yearly income x 8

Regardless of the retirement plan you intend to follow, you need to keep in mind that life will throw you curveballs and that deviations from saving plans will happen. Be patient, adjust and keep your eyes on the prize.

Reliable retirement calculators 

If you are not entirely convinced by the two formulas above, you can always resort to using one of the retirement calculators available online. They are useful tools but we recommend you test your calculations using more than just one of them, while comparing the results you got with the formulas presented above, just to be sure. 

Some online calculators that help are:

What should my target savings be at what age?

Going for more modest goals may give you a false sense of security, while setting a high bar may prevent you from taking proper moves to maximize your retirement funds. According to our estimations, most people who want to retire around age 65 should target reserves that equal 7 to 13 ½ times their pre-retirement gross income. A sensible goal is to save one to one and a half times your annual income by age 35; start at 25 to achieve it.

The Final Word

Do not lose sight of your goals. Make every effort to reach at least 15%. Of course, meeting that goal each year might not be realistic. Education, parental care, home renovation, a job loss, or other unforeseen situations may place greater financial strains on your budget. 

Still, your retirement should be high on your list of priorities at all times — don’t disregard your future comfort for today’s excesses.

About the Author James Holland

James is a certified financial planner who helps retirees and pre-retirees make the most of their money. He has more than 10 years of experience in the field, and he knows how to help people plan for retirement on a budget. James also offers advice on estate planning, long-term care, and other aspects of retirement planning.

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