How Much To Save For Retirement

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It has been a few years since we first talked about this topic on SavingAdvice, so we thought it would be a good time to revisit it.

Determining how much to save for retirement is straightforward yet complicated. There’s certainly no universal “number” (as in how much you need to have saved), and even two couples of the same age living in the same area might have vastly different savings requirements.

Here, we’ll provide general points to consider when determining how much you need to save and present a few scenarios to demonstrate how different saving levels–and projected income levels–could impact your retirement plan.

What It Boils Down To

While it can be challenging to predict the exact amount a person or couple needs to save for retirement, there are only a few fundamental items to consider: Your current age, your retirement age, and your spending needs.

As for the spending part, do you have a sense of your day-to-day expenses? Start tracking them pre-retirement, and then try to factor in any expenses that may arise during retirement.

As part of that exercise, consider what expenses you have now that will eventually disappear (like expenses for children, for example, or your mortgage), and expenses that will crop up that you don’t have now (like higher medical costs, including Medicare premiums).

That should get you in the ballpark at least. Then you can start thinking about if you want to leave any assets to your heirs or charity. You can budget for this if you like, but it’s not necessary. It depends on your priorities.

Don’t forget to take into account other likely income sources outside of your investment accounts, such as pensions or Social Security benefits. And consider whether you will receive any one-off windfalls in the future, such as an inheritance or profit from downsizing your home.

Finally, even if you do all of that work, you still might reasonably wonder: How much should I save? We’ll get into that a bit in our case studies below, but as a general rule, you could do worse than aiming for a savings rate of between 10% and 15% of pretax income during your working years, with your employer’s matching contribution counted in this figure.

Multiple Paths to The Same Destination

Let’s consider the elements that will most likely contribute to the success–or failure–of a retirement plan. We’ll largely focus on rates of savings, total return on investment accounts, and Social Security or pension income. We used the WealthTrace Retirement Planner to generate the results we will go through.

Our couple is currently in their mid-30s and has about $1 million saved thus far (and good for them!). They would like to retire when they get to their 60s virtually worry-free. Are they on track?

Annual Ret. SpendingAnnual SavingsTotal ReturnSocial SecurityMonte Carlo ResultInvestments At RetirementRet.
$75,000$1,5004%$50K @ FRA*27%$947k60They’re in trouble. That total return figure is too low for
people their age, for one thing.
$75,000$17,5004%$50K @ FRA*39%$1.3 mil60Boosting their savings helps immensely, but returns are still low.
$75,000$17,5006%$50K @ FRA*47%$1.8 mil60Getting better, but still needs work if they want to retire early.
$75,000$17,5007.6%$50K @ FRA*65%$2.9 mil65Higher annual returns and delayed retirement helps.
$70,000$24,5007.6%$63K @ 7080%$3.3 mil65Lower spending, later Social Security, and increased savings.

*FRA = Social Security’s Full Retirement Age, which in our couple’s case is 67.

There’s plenty happening in this table, so let’s run through it.

In the first row, a few things jump out. First, their savings rate is way too low. They’re both in their prime working years–and that means their prime savings years, too. Meanwhile, the total return they’re getting on the paltry amount they do save is only getting 4%. They should be doing a lot better. The Monte Carlo result, which shows the probability of success of their retirement plan, is only 27%. That is not going to cut it.

So in the second row, they decide to get more serious about saving. They’ve dusted off the 401(k) materials their employers gave them and are now contributing to their retirement accounts. And it pays off, with a 39% Monte Carlo figure. That’s good, but there’s still more work to do.

The third row has them switching up their asset allocation to get higher returns. People this age should usually be pretty aggressive with their investments. They’re moving in the right direction, but even a 6% return on their investment accounts is too low.

In the fourth row, they start to get more realistic about their retirement date, pushing it out five years. They also get even more aggressive with their asset allocation, which helps considerably. Now they’re at a 65% probability of success.

And finally, in the last row, they project spending a bit less during retirement, saving even more money annually before retirement, and delaying taking Social Security by three years. This gets them to a reasonable 80% Monte Carlo result.

One Way or Another

That all may make it sound like they need to tighten their belts to make this plan work for them, but that’s not the case. They’re young enough to make further adjustments to get their retirement plans sealed up tight. Mostly, if they just make sure their retirement accounts especially are invested aggressively, and contributions to them maxed out or at least very high, they’ll be fine.

It’s up to you how much you want to save for retirement. But whether you’re comfortable with the idea of living mainly off of Social Security payments, or somebody who plans on wanting lots of money in retirement to play with, you need a plan, not just an idea.

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