How Much Should I Save for Retirement?
Who doesn't have a retirement dream? Yours may be as simple as sleeping late or riding your bike on a sunny afternoon, or as daring as jumping out of a plane at age 90. Living your retirement dream the way you want means saving now—and saving enough so you don't have to worry about money in retirement.
How Much should I Save Each Year?
Our guideline: Aim to save at least 15% of your pre-tax income each year, which includes any employer match. That's assuming you save for retirement from age 25 to age 67. Together with other steps, that should help ensure you have enough income to maintain your current lifestyle in retirement.
How did we come up with 15%? First, we had to understand how much people generally spend in retirement. After analyzing enormous amounts of national spending data, we concluded that most people will need somewhere between 55% and 80% of their preretirement income to maintain their lifestyle in retirement.1
Not all of that money will need to come from your savings, however. Some will likely come from Social Security. So, we did the math and found that most people will need to generate about 45% of their retirement income (before taxes) from savings. Based on our estimates, saving 15% each year from age 25 to 67 should get you there. If you are lucky enough to have a pension, your target savings rate may be lower.
Here's a hypothetical example. Consider Joanna, age 25, who earns $54,000 a year. We assume her income grows 1.5% a year (after inflation) to about $100,000 by the time she is 67 and ready to retire. To maintain her preretirement lifestyle throughout retirement, we estimate that about $45,000 each year (adjusted for inflation), or 45% of her $100,000 preretirement income, needs to come from her savings. (The remainder would come from Social Security.)
Because she takes advantage of her employer's 5% dollar-for-dollar match on her 401(k) contributions, she needs to save 10% of her income each year, starting with $5,400 this year, which gets her to 15% of her current income.
Is 15% enough?
That depends, of course, on the choices you make before retirement—most importantly, when you start saving and when you retire. Any other income sources you may have, such as a pension, should also be considered.
Now that you know a savings rate to consider, here are some steps to think about that can help you get to it.
1. Start early
The single most important thing you can do is start saving early. The earlier you start, the more time you have for your investments to grow—and recover from the market's inevitable downturns.
If retirement is decades away, it may be hard to think or care about it. But when you are young is precisely the time to start saving for retirement. Even though it can be a challenge to save for the future, giving your savings those extra years to grow could make the struggle worth it—every little bit you can save helps.
Assumes no retirement savings balance before starting age. See footnote numbers 2 and 3 below for more information.
2. Delay retirement
Our 15% savings guideline assumes that a person retires at age 67, which is when most people will be eligible for full Social Security benefits. If you don't plan to work that long, you will likely need to save more than 15% a year. If you plan to work longer, all things being equal, your required saving rate could be lower.
Other steps to take
The road to retirement is a journey, and there are steps you can take along the way to catch up. Here are 6 tips to get started:
Let Uncle Sam help. Make the most of tax-advantaged savings accounts like traditional 401(k)s and IRAs. Your contributions are made before tax, reducing your current taxable income, meaning you get a tax break the year you contribute. Plus, that money can grow tax-free until you withdraw it in retirement, when it will be taxed as ordinary income. With Roth 401(k)s and IRAs, your contributions are after tax, but you can withdraw the money tax-free in retirement—assuming certain conditions are met.4 If you have a high deductible health plan (HDHP) eligible for a health savings account (HSA), consider contributing to an HSA to cover current and future health care expenses. HSA contributions are pre-tax and tax-deductible. Plus, when you use money saved in an HSA on qualified medical expenses now or in retirement, the withdrawals—of contributions and any investment returns—are tax-free.5
Max and match. Got room to up your 401(k) and IRA contributions before you hit the relevant annual contribution limit? Increase your automatic contributions as much as possible. At the very least, take advantage of your company match if you have one. That's effectively "free" money.
Take the 1% challenge. Upping your saving just 1% may seem small, but after 20 or 30 years it can make a big difference in your total savings. For example, if you are in your 20s, a 1% increase in your savings rate could add 3% more6 to your income in retirement.
Catch up. If you are 50 or older, be sure to make the most of catch-up contributions to your retirement savings plans. For 2023, employees over 50 can contribute an extra $7,500 over the $22,500 limit for their 401(k), 403(b), or other employer-sponsored savings plans for a total of $30,000. If you have an IRA, you can contribute an extra $1,000 in addition to the $6,500 contribution limit for a total of $7,500.
Size up your portfolio. Market movements can shift your investment mix. Too much in stocks can increase your risk of loss—too little can undermine growth potential. Aim to have a diversified mix of investments. At least once a year, take a look at your investments and make sure you have the right amount of stocks, bonds, and cash to stay on track to meet your long-term goals, risk tolerance, and time horizon.
Consider your investing style. If you don't have the skill, will, or time to manage your investments, consider an age-based target date fund or advisory accounts, where professional managers do it for you. There are also target risk funds, or target allocation funds, that offer a diversified mix of investments across asset classes. You pick the level of stock market risk you'd like based on your risk tolerance and the fund managers do the rest.
Make savings a priority
Keep your eye on your dreams. Do the best you can to get to at least 15%. Of course, it may not be possible to hit that target every year. You may have more pressing financial demands—children, parents, a leaky roof, a lost job, or other needs. But try not to forget about your future—make your retirement a priority too.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Past performance is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Investing involves risk, including risk of loss.
Target Date Funds are an asset mix of stocks, bonds and other investments that automatically becomes more conservative as the fund approaches its target retirement date and beyond. Principal invested is not guaranteed.
LPL Financial does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
A distribution from a Roth IRA or Roth 401(k) is federally tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death.
With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation.