4 Factors to Help You Determine How Much to Save for Retirement

Your individual circumstances are the biggest factor

Senior women on vacation
Lumina/Stocksy United

Some people will give you a rule of thumb on saving for retirement, such as “you need to save 10% of your income”. This is called the 10% savings rule. Following such a rule is better than not saving at all, but one rule does not apply to everyone.

The more you make, the more you'll need to save to maintain your standard of living in retirement. High income earners may need to save 20% or 30% of what they make.

I know you want an easy answer as to how much to save for retirement and I wish the answer were as easy as “save $436 a month”. It just doesn’t work that way. Like building a house, you have to make plans and determine what features you want. Then you can decide how much it will cost and how long it will take.

As with so many things, how much you need to save depends on your individual circumstances. Use the following factors to calculate your personalized answer:

  1. Desired spending in retirement
  2. Age today
  3. Projected retirement age
  4. How much you already have saved

Let’s take a look at each one of these items to see how they affect how much your needed savings.

1. Desired Retirement Spending

The larger the lifestyle you want to have in retirement, the more you will need to save. If you start young, and retire later, by consistently saving each month you may be able to achieve a comfortable retirement lifestyle.

How much is enough? It depends!

To get a rough idea of how much you’ll need, you can assume you’ll need at least $100,000 for every $5,000 a year of retirement income that needs to come from savings. That means if you want $50,000 of income (in addition to whatever you may get from Social Security and/or pensions) you’ll need at least $1,000,000 saved.

Some people see a potential million dollar price tag for retirement and get overwhelmed with the idea of trying to become a millionaire and then they don't save at all. This is not good. Don't let this happen to you. Work toward making small manageable adjustments that help you save more. Every bit counts. 

And remember, many people find reasonable ways to live on less during retirement. If you have Social Security and a pension, you may not need anything close to a million. 

2. Current Age

The more time you have before your desired retirement age, the less you’ll need to save each month to reach your goals. If you have less time, you’ll need to save more.

In addition, if you have more time, you can allocation a larger portion of your investments to higher risk options that have the potential (but not the certainty) of earning higher returns. If you have less time, such as being within five years of retirement, you'll need more allocated toward safer investments so that a large downturn in the market doesn't derail your retirement plans.

If you think you want to retire early, you'll need to consider the effects of having more years in retirement. You'll also want to calculate the out of pocket health care costs you will encounter up until you reach age 65 (which is when Medicare begins).

Even after Medicare begins, you'll still have insurance premiums and co-pays. Many folks who are used to having their health insurance subsidized by their employer are unpleasantly surprised at the costs they will need to build into their budget once they retire.

If you are getting a late start on saving for retirement, you may need to make some big changes. Consider immediately downsizing your lifestyle (smaller home and car, less travel and shopping) so you can save more. Or you can plan on working longer.

3. Projected Retirement Age

When the idea of retirement first started, people did not live as long as they do today.

With improved health care, if you retire at 62 you might be spending 25—35 years in retirement. That will require a hefty nest egg. If you haven't started building your nest egg consider working longer.

Many people are going to be better off working longer, at least until age 70. By working until 70 you can delay the start of your Social Security benefits and get a larger amount of guaranteed income from Social Security at age 70.

There’s a lot that goes into the decision as to when to retire. If you have a particular age in mind start your retirement planning as soon as possible. Research has shown those who start planning at least five years away from retirement are far happier and have a smoother transition into retirement.

4. Existing Savings

If you inherited money or already have a decent amount saved in your 401(k) or IRA, you may have a good head start on saving for retirement already.

If you have a home or business, be cautious about how much of that asset you count as being available for retirement. For example, if you plan on downsizing your home thinks about what is realistic. If you have no mortgage and sold the house for $500,000 you would still need a place to live. If you bought a retirement patio home for $350,000 then of your current home value you could consider $150,000 of it as retirement savings—but not all of it. Later in life you could also use a reverse mortgage to free up some of the remaining equity.

For those with existing savings use the four steps to determine how much to retire to get a rough calculation of how close you are to meeting your desired retirement goals.

If you are starting from scratch, you want to save as much as possible, or think about some non-traditional approaches to retirement savings such a renting out a room in your home, living the RV lifestyle, or retiring overseas.