How Much Should You Save for Retirement?
All the available data show Americans are not saving enough for retirement -- or for other financial goals. In fact, recent research from Bankrate shows that 65% of Americans are saving 10% of their income or less, with 19% of families saving nothing at all.
The low savings rate is leading to a retirement crisis in America, with most Americans having far too little to sustain them through their golden years.
You don't want to reach retirement without the nest egg you need to thrive, so you need to decide how much to save for retirement. The chart below should help.
Image source: Getty Images.
How much? That depends
That amount is going to vary depending upon the age when you start saving and what your goals are.
The chart shows how much you'd end up with at age 67 (the full retirement age for Social Security for those born in 1960 or after) if you start at different ages and save different percentages of income in a tax-advantaged savings account. The chart doesn't factor in any employer matches on a 401(k); it simply looks at total percent of income saved.
Starting median income is based on data on 2016 from the Current Population Survey (CPS) conducted by the U.S. Census in 2017. The chart assumes you maintain the same percentage contributions throughout your career and receive 2% annual raises. A 7% return on investments is assumed.
Age | Median Income | 5% of Income | 10% of Income | 15% of Income | 20% of Income | 25% of Income |
25 | $40,373 | $660,940 | $1,321,881 | $1,982,821 | $2,643,762 | $3,304,702 |
30 | $46,064 | $510,643 | $1,021,286 | $1,531,929 | $2,042,573 | $2,553,216 |
35 | $52,077 | $358,487 | $770,975 | $1,156,462 | $1,541,950 | $1,927,437 |
40 | $55,311 | $267,951 | $535,903 | $803,854 | $1,071,805 | $1,339,756 |
45 | $53,269 | $163,878 | $327,756 | $491,634 | $655,512 | $819,391 |
50 | $54,578 | $101,618 | $203,237 | $304,855 | $406,474 | $508,092 |
Data Source: U.S. Census Bureau. Calculations: Author
As you can see, the chart shows a dramatic difference in how much you'll end up with if you start saving young versus if you wait until late in life.
You could end up with a nest egg over $1 million just by saving 10% of your income if you started at 25, but would need to bump your contributions up to 15% of income to save more than $1 million if you waited until 35 to start.
Start thinking about more than 10%
The chart also shows that, for most people, saving 10% of income is simply not going to be enough.
Almost 4 in 10 people believe you need $1 million to retire, but in 13 U.S. states, $1 million would last less than 20 years if you retired today.
You won't even cross that $1 million mark unless you start saving at least 10% of income at 25 and stick with that savings rate throughout your whole career -- or unless you save at least 15% of your income if you start at 35.
And this chart doesn't take into account taxes you'll have to pay when you withdraw from a 401(k) or the inflation that will eat away at your purchasing power.
If you're 30 years old and making the median income of $46,064 today, by the time you retire at 67, you'd need $103,134 per year to replace 75% of that $46,064 income, assuming a 3% inflation rate. If you lived until 85, you'd need an annual income of $175,578.
Assuming you withdrew 4% of a $1,021,286 nest egg -- which used to be a safe withdrawal rate but which may be too high now -- your starting income would only be $40,851. This is far less than what you'd need, even with Social Security supplementing income.
You'd be closer with a $61,277 annual income produced by a $1.5 million nest egg -- but you'd need to save at least 15% of your income to get there. And, if you really wanted to ensure you'd have enough to maintain your lifestyle and cover other expenses such as healthcare, you'd be much better off striving for a 20% savings rate to hit the $2 million mark.
Bottom line: Save as much as possible
As the chart shows, even if you start young, you'll want to aim for investing a minimum of 15% for retirement to ensure you have enough saved.
If your income is higher, this still applies to you. Sure, you'll be saving more, but you'll also have a higher income to replace in retirement, unless you dramatically downgrade your lifestyle.
While saving 15% to 20% of your income may seem daunting, banking your raises, automating your investments, and looking for ways to cut costs by making a budget and eliminating unnecessary spending could help make it possible.
And if you are lucky enough to have an employer match, the contributions from that job perk can help you to reach your 15% to 20% threshold more easily.
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