What percentage of Income should you save for Retirement?
Have you ever imagined yourself in your golden years?
Perhaps you're enjoying the simple pleasures of life at home with your family, or maybe you're taking that trip you've always wanted.
But the truth is that your golden years are heavily tied to your present actions and decisions.
To live your retirement dream the way you want, the logical thought is to start saving now and make sure you save enough so you won't have to worry about money in retirement.
How to do it? Design a strategy and set aside a portion of your income for your future self.
The amount of money you need for a comfortable retirement depends on you. It's difficult to know exactly how much you'll need, but there are some general tips to consider.
Start by assuming you'll have a steady income until you turn 65.
In this article, we'll help you figure out what percentage of income you should save for retirement.
The older version of yourself will likely thank you for reading this article.
Why is it important to save for retirement?
Let's be clear: People are living longer and expecting to engage in many activities during their retirement.
However, a retirement income is directly related to your retirement strategy and how much money you have saved for your older self to rely on.
Individuals aged 65 and older have a median annual income of $47,620, while the mean annual income is $75,254, according to the most recent data from the United States Census Bureau.
In order to reach that income goal, you need to start saving.
Here are some additional points to consider:
Social Security alone probably won't be enough for your retirement income.
Living with your children because you can't afford to live independently isn't how most people want to spend their golden years.
The impact of saving in a tax-deferred retirement account through compound interest cannot be overstated.
The general rule: 15% of your income
Rule of thumb: "Save 15% of your income for retirement."
A key point many people overlook is that saving 15% only works if you start in your mid-20s or early 30s.
If you begin saving later, you’ll likely need to save more to keep your current lifestyle in retirement.
According to a study by the Schwab Center for Financial Research, using their 2023 market forecasts, the amount you should save from your paycheck depends on your starting age.
The earlier you start saving, the less you usually need to save because of compounding interest.
If you’re older, it’s best to save what you can and try to increase that amount over time, especially when you get pay raises.
How the 15% rule works for different income levels
People with lower incomes might struggle to save 15% for retirement after paying for basic needs. However, saving even a smaller percentage can still help if done regularly over time.
One strategy is to start with a lower amount and increase it as income grows.
For those with medium incomes, following the 15% guideline can help balance current spending and future savings. Regular savings can greatly grow wealth over time due to compounding interest.
People with higher incomes usually have more room in their budgets, making it easier to save 15% or more for investments.
They can also benefit from tax-advantaged accounts and employer matching contributions, which can boost their retirement savings even more.
Employer contributions and how they affect your savings rate
Employer contributions are the funds that employers add to their employees' retirement savings accounts, like 401(k) plans, 403(b) plans, or other defined contribution plans.
Employees are more likely to participate in retirement plans and contribute more when they know their employer will add extra money if they save
These contributions can take different forms, including matching, non-elective, and profit-sharing contributions.
These contributions not only encourage people to participate but also boost overall savings levels.
Many companies offer a matching program where they add to your retirement savings based on how much you contribute.
For example, if you put in 6% of your salary, your employer might add 50% of that amount.
This helps more people, especially younger and lower-income workers, join the retirement savings plan.
The type of contribution you get from your employers depends on a few factors, like the company's financial health, competition, employee needs, and legal requirements.
Contributions to retirement accounts are typically made on a pre-tax basis, reducing the employee's taxable income.
Besides, the growth of these contributions is tax-deferred until withdrawal.
How to adjust your savings based on your age
According to Fidelity Investments, a good rule to follow is to save 10 times your income if you want to retire by age 67.
This total includes money in retirement accounts and investments. Here’s how much you should aim to save by each decade:
- By age 30: Save an amount equal to your annual salary. For example, if you earn $55,000 a year, you should have $55,000 saved by age 30.
- By age 40: Save three times your income.
- By age 50: Save six times your income.
- By age 60: Save eight times your income.
- By age 67: Save ten times your income.
If you retire at 62 (the earliest age to claim Social Security), you’ll need to save more because you will have five extra years without income.
But, if you retire at 70, you might not need to save the full 10 times your income since you’ll have worked longer and will have fewer years to spend your savings.
Starting early: 20s and 30s
In your 20s, aim to save at least 5% to 15% of your income. Starting early, even with small amounts, can lead to significant growth thanks to compound interest.
Focus on developing good saving habits, like contributing to retirement plans offered by your employer, especially if they match your contributions.
By age 30, try to gradually increase your savings to around 15% of your income as you grow in your career.
Keep in mind that life changes, such as starting a family or buying a home, can affect how much you can save. Adjust your budget as needed to keep saving consistently.
Catching up in your 40s and 50s
By age 50, aim to have saved 6 times your salary. So in your 40s, continue saving at least 15% of your income, and try to increase this amount if you can, especially if you haven’t met previous savings goals.
This is often a time when you earn the most money, so focus on contributing to your retirement while also considering any educational expenses for your children.
By age 60, aim to have saved between 8 to 11 times your salary. So in your 50s, as retirement gets closer, try to save about 20% of your income to catch up on savings.
Review your retirement plan and consider making "catch-up" contributions if your retirement accounts allow for it.
Factors that influence the ideal retirement savings percentage
Here are two examples:
Laurel plans to retire at age 70. She will need to save 8 times her final income to maintain her lifestyle before retirement.
Ronald wants to retire at age 67, so he will need to save 10 times his income before retirement.
What factors will come into play? Lifestyle choices, spending expectations, investment returns, inflation, among others.
Lifestyle goals and retirement age
The age you choose to retire can significantly affect how much you need to save and your savings goals along the way.
The longer you wait to retire, the less you need to save.
Delaying retirement allows your savings more time to grow, reduces the number of years you’ll need to rely on them, and increases your Social Security benefits.
The lifestyle you want in retirement also affects how much you need to save. If you plan to live simply, you might need about 8 times your income.
However, if you want to travel a lot or maintain a higher living standard, you may need to save up to 12 times your income.
To cover higher expenses in retirement, you’ll need to save more during your working years to ensure you have enough money.
Inflation and future healthcare costs
The cost of living goes up over time because of inflation, so it's important to include this in your retirement savings plans.
Planning for inflation is a part of every retirement strategy because it affects both your current expenses and future needs.
But healthcare costs often rise faster than general inflation, putting more financial pressure on retirees.
For example, by 2024, a 65-year-old might need about $165,000 in after-tax income just for healthcare.
Medicare doesn’t cover all healthcare expenses, so retirees often have to pay premiums, deductibles, and other out-of-pocket costs, which can add up quickly.
Many retirees underestimate these costs, which can lead to budget shortfalls.
Your personal health also affects future healthcare costs. Those with chronic conditions may face higher expenses due to more frequent medical care.
Tools to help calculate the right percentage for you
- You can manage your money better using your bank's mobile banking app.
This app helps you easily track money coming in and going out of your account and allows quick transfers between your checking and savings accounts.
Make it a habit to check your app regularly and set up alerts for transfers, payments, low balances, fees, and other important updates.
This will help you become more aware of your finances and plan for the future.
- To save money consistently, start by creating and sticking to a budget.
There are many tools like YNAB (You Need a Budget) that can connect to your bank account to help you track your spending by category.
- A basic 401(k) retirement calculator can help you estimate how much your 401(k) will be worth over time based on your current balance, yearly contributions, and expected returns.
- Advisors, like Bloom Financial, offer tools to help you manage your finances effectively.
These tools can assist with budgeting, setting goals, handling major life events (like social security eligibility), and understanding taxes.
Conclusion: Adapting your savings strategy over time
Your future is connected to your present more than you think.
Like any habit, beginning to save part of your income for your retirement can begin with small steps that will evolve into a solid strategy, ensuring peace of mind during your golden years.
However, starting as soon as possible on this path is a requirement, no matter your age.
At Bloom Financial, we are ready to help you get started with our Retire As You Desire® Lifetime Retirement Income Plan. Just contact us here.
