This is how much you should be saving for retirement

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This is how much you should be saving for retirement

How much you need to save for retirement depends on where you live and your individual situation. You’ll often hear the benchmark of $1 million as the standard retirement savings goal. This is a good place to start, but you should additionally use your annual spending to determine approximate retirement needs.

Estimate the cost of retirement by multiplying your expected annual retirement spending by the number of years you'll likely be retired. Anticipate a retirement of at least 20 to 30 years. To help you plan based on where you live, we broke down the cost of retirement around the country.

How much will I spend annually after I retire?

Personal spending varies, but the average person spends about 25% less after age 65, according to BLS data.

Average spending for individuals age 65+ vs spending for younger individuals

Age Spending difference
25-35 11% less
35-44 27% less
45-54 34% less
55-64 24% less

How much you should save for retirement

Experts generally recommend saving 15% or more of your pre-tax income specifically for retirement. For example, if you have a salary of $60,000, then you should ideally be saving at least $9,000 per year for retirement.

Here are some rule-of-thumb numbers to track your retirement savings.

Age Retirement savings you should have
30 1x your salary
35 2x your salary
40 3x your salary
45 4x your salary
50 5x your salary
55 6x your salary
60 7x your salary
65 8x your salary

The bottom line? Most Americans are not saving enough.

You need to invest your retirement savings

How do you actually meet these savings goals?

First, use a retirement account. This includes 401(k) accounts from your employer or an individual retirement account. These accounts have specific tax advantages that help you maximize your retirement savings. Learn more about which retirement account is right for you.

It isn’t enough just to save, though. Investing is likely the only way to meet your savings goals. Just putting your money in a savings account won’t give you enough to retire (though a high-yield savings account can help you save for other goals).

Investing does come with risk, but you'll still likely make enough in the long-term. (Read more on what to do when the stock market underperforms.)

How & when to invest for retirement

How you should invest depends on your personal circumstances and savings goals. A good place to start is with our guide to picking stocks. But more important than how you invest is probably when you start investing.

Using BLS data, we estimate that if the average person saves 15% of their pre-tax income every year, starting at age 25, they can reasonably expect to have $1.5 million by age 65. That’s enough to comfortably retire almost anywhere in the country.

The longer you wait to start investing for retirement, the harder it becomes to build savings.

Average lifetime returns for the stock market are about 10%. If you start saving 15% of your income at 25, the rate of return you would need to reach $1 million in savings is just 3.5%. That’s well within the stock market’s average returns.

Waiting until age 40 means you need returns of 6%. Waiting until age 50 would require returns of more than 10.1%. If you start after 50, the returns you need become nearly impossible. Someone who starts saving at age 60 would need returns of more than 38%.

Read more on how to save for retirement when you can’t afford it.

However, this is assuming you can save 15% of your income. Most save less than 8% of their income, based on estimates from the Federal Reserve Bank of St. Louis. Saving at that rate (assuming you put all your savings toward retirement) means you need double the rate of return.

The biggest way to help yourself save for retirement is by starting now. And make sure to invest, not just put money in a savings account. We have a guide on how to start investing even if it intimidates you.

Image: Vlad Sargu