What Percentage of Your Salary Should Go Toward Retirement?

Reviewed by Andy SmithFact checked by Suzanne KvilhaugReviewed by Andy SmithFact checked by Suzanne Kvilhaug

How much money you need to be financially comfortable during retirement varies widely depending on the individual, and while it can be difficult to forecast exactly what you’ll need during retirement, there are benchmarks to aim for. 

The ideal savings rate varies by expert or study because making plans for the future depends on many unknown variables, such as not knowing how long you’ll be working, how well your investments will do, or how long you will live, among other factors. Any calculation for retirement is usually an educated guess. However, it is possible to follow some key rules, starting with the assumption that you will have a steady income stream until age 65.

Key Takeaways

• There are many unknown variables that make it difficult to accurately forecast retirement needs.
• There are benchmarks based on historical data that provide ballpark figures.
• Research says to save roughly 15% of your annual income if you start at age 25, but those waiting until later in life to start saving will need to contribute more.
• It’s best to start saving early and take advantage of matching contributions in 401(k)s if offered.
• Starting a college fund for your children is a good way to avoid having to raid your retirement accounts to pay for their higher education.

How Much Should You Save?

Academic retirement saving studies use the term replacement rate. This is the percentage of your salary that you’ll receive as income during retirement from your retirement accounts. For example, if you made $100,000 a year when you were employed but received $38,000 a year in retirement payments, your replacement rate is 38%. This rate may go up and down during the course of your retirement depending on a variety of factors such as market fluctuations and your tax bracket, which could be subject to change.

Replacement Rate

When you plan for retirement, your pre-retirement income typically sets the basis for your estimated spending during your retirement. For example, if you earn $100,000 a year, you would need to replace a percentage of your annual salary. Depending on your expenses, you could use a 75% replacement rate, a typical rate used by financial planners, to spend when you stop working. Your preretirement income replacement rate is based on your estimated spending in retirement.

Of course, 75% of your annual salary may be too high if you haven’t saved enough for retirement, and how much you use in retirement depends on the type of retirement saving vehicle used, like a Roth individual retirement account (IRA) versus a traditional IRA, or a 401(k).

Estimating Your Replacement Rate

So, if your annual salary is $100,000, and you use the 75% replacement rate as a starting point, you will need to earn $75,000 from various retirement resources, such as 401(k) accounts, part-time work, and Social Security. To be extra careful when planning your retirement replacement rate, you may want to leave out Social Security.

The good news? Most people, especially couples, need less income, not more, during retirement for various reasons, including lower taxes and simply spending less money.

Important

Most retirement accounts are pretax dollars, meaning you will be responsible for paying taxes on your withdrawals, which is something to take into account.

The Family Factor

These studies calculate savings for individuals, but what about families? Parents with children may choose to save for their college education. One rule is to save at least $2,000 times your child’s age each year. This will keep you on track to help cover the cost of college.

Costs associated with children can make saving for retirement even more daunting, but if you have a college fund for your kids, you are less likely to dip into your retirement to pay for school.

You will need to consider what kind of lifestyle you want to have when you retire. Also consider whether both spouses will retire simultaneously, or if one spouse will retire first.

Some experts recommend saving 10 times your annual income by age 67, but not all couples will have that much in retirement.

The Matching Contribution Bonus

For people who start saving early and take advantage of employer-sponsored plans, such as 401(k)s, hitting savings goals isn’t as daunting as it may sound. Employer matching contributions could significantly reduce what you need to save per month. These contributions are made pretax and it’s the equivalent of “free money.”

Say you save 3% of your income during a year and your company matches that 3% in your 401(k). “You will make a 100% return on the amount you saved that year,” said Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Massachusetts.

How Much Should I Save for Retirement?

It is a good idea to save a percentage of your paycheck each month. According to research by Fidelity, if you start at age 25, you should save 15% of your compensation. If you start later, you should save more. But saving any amount, especially if your employer will match it, is worthwhile too.

What Percent of My Salary Do I Need in Retirement?

Most financial retirement advisors suggest your annual retirement income should be around 75% to 80% of your pre-retirement income, in the year prior to your retirement.

Should I Open a 401(k)?

If your employer offers you access to a 401(k) plan at work, you should take advantage of it, no matter how little you can afford to put into it each paycheck. Even a small amount can grow over the years due to compounding interest. And if your company matches your contributions, it is essentially free money going into your account. You can start with smaller contributions if you are, say, paying down student loans, and then as you progress in your career, ramp up your contributions.

The Bottom Line

There is no one-size-fits-all answer to how much you should save for retirement, but academic studies based on historical data can give you a ballpark figure. Aim to save around 15% of your annual salary if you’re early in your career. This alone might seem like a tough task, but take advantage of employer matching and find new ways to reduce expenses. If you wait until later in life to start saving, you’ll need to put away more of your salary, or risk running out of money during retirement.

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