Retirement Savings by the Decade

Glass jar coins with alarm clock background for retirement concept.
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How much money should you have saved for retirement, by a particular age, in order to be on the right track? Fidelity Investments has released age-related retirement saving guidelines with these results: you should have your annual salary saved by age 35, three times your salary saved by age 45, and five times your salary saved by age 55. By the time you turn 65, you should have eight times your annual salary saved up.

This leads to the obvious question: how do you define annual salary? Your salary at age 22 is different than your salary at age 35. Denote salary based on the amount you're getting paid at each particular age. In other words, if at age 35 you earn $40,000 a year, you should have $40,000 saved. If by age 45 you earn $50,000 a year, you should have three times that amount, or $150,000, saved.

You Don't Know How Much Money You'll Make

Of course, you don't know how much you'll earn a decade or two in the future. However, for planning purposes, you can project whether not you're on the right track. There are two ways to handle this: either take your current salary and add 4 percent for each year, which is inflation plus 1 percent, or pick the number that you would like to be earning by the time you turn a particular age. For example, if a person's goal is to earn $90,000 per year by the time they're 35, they'll need to start saving at a rate equivalent to that projection.

That Seems Like a Massive Savings Rate

These numbers may make you feel like you're being asked to save ever-increasing sums. In the example cited above, a person would have to save $40,000 during the first 10 working years of her life (age 25-35), followed by $90,000 during the second working decade of their life (age 35-45).

In other words, they would have to double their savings rate during her second working decade (age 35-45), a period of time when they're probably also raising kids, paying the mortgage, and perhaps taking care of parents. How is this possible? Through the power of investing. During the first working decade of your life, your contributions will mostly come from your earned income. After that, you'll start earning substantial dividends, interest and capital gains.

These will play a major role in contributing to the accelerated growth rate of your retirement account during the final few decades of your working life. In other words, your money will make money. You don't necessarily need to save the entire amount from your paycheck; the amount you invest will grow on its own as you continue making contributions.

Keep the End in Mind

If the short-term numbers seem overwhelming, try focusing only on the end goal. After all, the point of the exercise is to project how you can save enough money to replace 85 percent of your ending salary by the time you retire. If you don't like the practice of trying to hit certain savings goals by age 35, 45, or 55, here's an alternative: decide how much money you would like to receive annually during your retirement.

Work backward from that number to see how much you need to save every month, starting now. You need $1 million to live on a salary of $40,000 per year in retirement, according to the 4 percent rule. You can use this table to figure out how much you need to put aside every month in order to build a $1 million portfolio.

For example, if you're 34, you have nothing saved for retirement yet, and you want to retire at 65 with $1 million in savings, you'll need to start putting away $750 per month, assuming your portfolio performs at the market's historic long-term annualized average of 7 percent.