Are you on track to retire? How would you even know? In this post I review the various recommendations on how much you need to have saved at every age and income level in order to retire. And if financial independence or early retirement is your goal, use the chart to instantly calculate where you should be and how to get there.
You know you need to save money and plan for retirement. You may even be contributing a certain percentage of your paycheck to your employer-matched retirement account. But do you know if it’s enough? Are you really saving as much money as you should be?
This is a question I often ask and find quite difficult to answer. There are so many factors to consider, such as additional income sources, Social Security benefits, taxes, changing income levels and the age at which you really want to retire. So I wanted to dig deep and research the various recommendations available that might help me determine whether I was really on track or not.
In my search, I learned something really interesting. In fact, it has completely changed how I think about retirement savings.
There is a better way to think about this.
A method of calculating what you need to save that simplifies this whole overwhelming and confusing topic. The key is to remove the earnings component and simply focus on how much you save as a percentage of your income.
In this post I’ll outline the general recommendations on both how much you should save for retirement by age group and income level. Then, I’ll review an alternative method of determining how much you will need to save and the milestones you can expect to reach along the way based on when you actually want to retire. Because if financial independence or early retirement is your dream, you need a different guideline.
Lastly, you can use the chart provided below to calculate exactly where you are right now, and what you need to save in order to achieve your financial goals.
The 4% Rule
A general retirement rule of thumb is that you can safely withdraw 4% of your investment savings each year without depleting your nest egg.
This general rule of thumb is based off of historical stock and bond data between the years 1926-1976. Further research was conducted and is commonly referred to as the Trinity study ( A paper published in 1998 by three finance professors at Trinity University). To make a long story short (although you can read more here), you can safely retire when withdrawing 4% of your retirement portfolio is enough to cover your monthly expenses. A more recent review uses more sophisticated computer simulations to account for a wider range of potential market variations, and concludes that a more conservative 3% withdrawal rate is safe in 90% of scenarios.
Assuming the 4% rule, if your current annual expenses are $60,000, and you want to maintain this in retirement, you will need $1.15 million in savings in order to retire (also assuming you won’t be relying upon pension, social security or other monthly income).
Another way to look at this formula is to multiply your annual expenses by 25. You will need 25x your expenses saved by retirement in order to safely withdraw 4% of your savings and cover your accustomed lifestyle.
The 4% rule provides a rough estimate of how much you need to aim to save by the time you want to retire.
Account for additional income
Regardless of when you want to retire, it’s safe to assume that you would benefit from having 25x your monthly expenses saved. But what if you have passive income or additional income streams that you can count on?
For example, if you have rental properties that will be paid off by retirement age, you can count on your passive income increasing dramatically. If real estate investing is part of your retirement plan, this passive income could even cover your entire monthly expenses indefinitely.
Read more about real estate investing at Real Estate Investing: 6 Pivotal Reasons To Get Started Today
If you plan to retire after the age of 62, you may also want to factor in Social Security benefits.
So before you feel overwhelmed that you couldn’t possibly be able to save 25x your monthly expenses and that you’ll never be able to retire, take some time to run the numbers and come up with an estimate of how much additional income you can expect due to other income sources.
Annual salary vs. monthly expenses
You may notice that many calculators and recommendations use “annual salary” rather than “monthly expenses”.
I find this rather confusing and misleading because your annual salary includes money you are saving for retirement. Since the goal of retirement is to live off the savings you worked so hard to accumulate, you won’t need to continue budgeting for this additional “expense”.
This is in part where the general assumption that you will need 20% of your annual income in retirement comes from, they are assuming you save 15-20% of your income right now.
How much you actually save will vary by the stage of life you are in now and how early you want to retire. I find a much better way of thinking about this is to track your expenses and understand just how much you need to live off of currently, and how much you want to live off of in retirement.
Keep in mind that your expenses may vary quite a bit in retirement. For instance, do you want to travel more? Will you want to travel on a budget or enjoy nicer accommodations? Be sure to factor in how much more (or less) you anticipate wanting.
To see what the more traditional recommendations are on how much you should have saved for retirement by age group, I looked at the top investment firms. Here’s what they say:
According to fidelity, you should aim to save 8x your annual salary by the age of retirement, around age 67.
If you break this down by age group, you should have saved:
- 50% of your annual salary by age 30
- 2x your annual salary by age 40
- 4x your annual salary by age 50
- 6x your annual salary by age 60
- 8x your annual salary by age 67
These numbers are based upon the assumption that you save 15% of your income, including employer matching contributions, and that you invest in at least 50% stock allocation.
You’ll notice that this doesn’t come close to the 25x suggestion I provided above. If you wait to retire until the age of 62, you will have social security retirement benefits and, hopefully, some type of pension or retirement benefits from your work.
If however, you have a salary that varies with time, you want to cut back your hours during certain life stages, or financial independence and early retirement is your goal, this plan doesn’t work.
Similar to Fidelity, they recommend a savings rule of thumb of multiples of your income by age group. However, they offer a slightly more sophisticated model by including a key factor: income.
It helps to take income into account because it will affect how much you can expect in Social Security benefits. The more you earn, the smaller the percent of income replacement. For instance, if you earned $50,000 annually, Social Security will replace 51% of your income in retirement. But if you earn $250,000 annually, they will only replace 14%.
According to research by J.P. Morgan Asset Management, these are the retirement savings checkpoints you should aim to achieve, based on age and income level.
Millionaire next door
The book The Millionaire Next Door, which is the result of over a decade of survey data analysis and interviews with millionaires, provides a formula to estimate how much money you should have saved at any age and income level in order to accumulate wealth.
Target Net Worth = Age X Annual Pre-Tax Income / 10
According to this formula, if you are 40 years old and earn $75,000 annually, you should have around $300,000 in savings.
This formula can be helpful as a checkpoint on your savings journey. It helps to distinguish between whether you are a saver or an over-consumer.
The authors spent years interviewing and studying the habits and traits of millionaires. The average age of these millionaires was somewhere in their 50’s. This formula is great if you are over 35 years of age, but falls short if you are in your 20’s or early 30’s.
If you take the case of someone just out of college and starting to earn money for the first time. The average 25 year old just out of college has $30,000 in student loan debt and earns around $56,000. According to the formula, this person should have over $87,000 in savings but instead they have more than $30,000 in debt to pay off.
If you want to build wealth, and you are over the age of 35, it’s a helpful tool to check how you’re doing.
Read more about the savings habits of millionaires (and how you can become one too) at 9 Common Traits of Millionaires That You Can Easily Adopt.
I also highly recommend giving this book a quick read, it is very eye opening. It’s actually quite easy to become a millionaire, and the average millionaire is likely right next door to you. Learn how they save and build wealth and then apply these habits to your own life.
Another common source for determining how much you should save is Dave Ramsey. He also makes the point that anyone, regardless of income, can retire a millionaire. And I fully agree.
Milestones to aim for include the following:
- Save 3-6 months monthly expenses in an emergency fund
- In your 40’s you should be contributing at least 15% of your gross income towards retirement
- Aim to payoff your mortgage in your 50’s and continue saving 15% of your gross annual income for retirement
Factors that determine your savings goals
When you plan to retire
The longer you give compounding interest to take effect, the more you will be able to accumulate and the less you will need to save along the way.
Additionally, the earlier you retire, the smaller your withdrawal rate should be so that you don’t deplete your account early.
Social Security Benefits
If you wait to retire until the age of 62, you can use your Social Security benefits.
Delaying retirement will increase your benefits by 8% per year from the ages of 62-70. That being said, depending on your age, it’s not necessarily reliable to count on these benefits.
As a quick aside, according to the latest 2017 report from the Social Security trustees, they are expected to run out of money by the year 2034. While payments won’t cease entirely, they will likely be diminished. Retirees could see as much as a 22% cut in benefits.
The takeaway here is that it’s best to plan for your own retirement, with Social Security and pension benefits as a potential bonus.
How much you plan to spend in retirement
I imagine that the earlier I retire, the less I will feel the need to spend in retirement. Here’s my reasoning:
If I have 30 years of retirement and I go on one big trip a year, that’s a whole lot of travel I’ll be able to do. So every year I’ll want to account for my standard living expenses, plus around $2,000 extra for travel.
However, if I only have 10-15 years of usable retirement to travel (when I’m active and fit enough to easily get around), I need to fit that all in within a shorter time frame. And, I’ll probably want better travel and sleep accommodations. Travel will be more frequent and expensive.
How much you will want in retirement is very personal and varies by the person and family. But it bears thinking about and factoring into your retirement planning and savings rate.
How much should you have saved by age group?
It absolutely depends on your unique situation. So if you want to determine what your milestones are, here are some important questions to think about:
- When do you want to retire?
- What are your monthly expenses now?
- How much will your monthly expenses change in retirement?
- What is your current savings rate?
- How much do you have in retirement savings now?
- What additional income do you expect to have at retirement age?
These questions help you determine what you will need in retirement and how you will get there. Read on to learn how.
Why your savings rate maters
One very clean way to view retirement savings is to simply focus on your savings rate.
If you save 100% of your income, it means you are living off your passive income streams and are already retired. If you save 50% of your income, it means you only require half of your annual salary to live off of, and you will be able to retire once you’ve saved 25x that amount.
The more you save, the faster your journey to retirement.
In fact, if you want to retire early, compound interest doesn’t have enough time to take effect. The most important factor is your savings rate.
Want to know how long it will take you to save $1 million? Visit This Is How Long It Will Take You To Save $1 Million.
One key takeaway, if you want to retire by age 65, you need to maintain a 10-15% savings rate. This doesn’t change. If you want to retire earlier, you need a higher savings rate.
A 35 year old wants to retire by the age of 50. She has $100,000 in retirement savings. Her monthly expenses average $4,000 per month, and she expects this to be sufficient in retirement. She earns $75,000 annually, therefore her savings rate is 36%.
Saving rate (%) = ((Income – Expenses) / Income) x 100
- Based on the 4% rule, she will need to save $1.2 million
- With a savings rate of 36%, it will take her roughly 20 years to save $1.2 million
- She will retire at age 55
- Since she wants to retire in 15 years, she needs to increase her savings rate to 48%
Given that the average savings rate in America is only 6.7% (2018 data from Trading Economics), there are a lot of people that are going to experience a rude awakening that they won’t be able to retire.
The ultimate retirement chart to calculate how much you need to save at every age
The chart recommended by J.P. Morgan is useful in many situations. However, since a savings rate of only 10% is low and I don’t want to work until I’m 55, let alone 65, I’ve created a chart based on the following:
- Start saving at the age of 30
- Pre-retirement investment return: 7%
- Post-retirement investment return: 5%
- 4% rate of withdrawal
- Retirement goal of saving 25x annual expenses
- Inflation rate of 2.5%
- Not accounting for Social Security benefits
Take away points from this chart:
- You don’t have to factor in your income since this is based on your savings rate as a percentage of you pre-tax income
- The lower your savings rate, the more you can benefit from compounding interest
- The higher your savings rate, the less your investment rate of return matters
- The lower your monthly expenses, the less you have to save for retirement as a percentage of your total income
Rebecca earns $100,000 annually and has a savings rate of 40%.
- She saves 40% of her income, or $40,000 every year.
- Her expenses are therefore $60,000.
- She needs to save $60,000 x 25 in retirement nest egg in order to safely withdraw 4% and continue covering her monthly expenses.
- By the age of 40, she should have saved 6.41 times her annual salary, or $641,000.
- She can expect to reach her retirement savings goal when she saves 15 x her annual salary (the same as 25 x her annual spending), which happens somewhere between 50-55 years of age.
Keep in mind that this chart assumes that you start saving at the age of 30 and that your savings rate remains consistent. In reality, some years you will be able to focus more on retirement savings, other years you will likely need to focus on other financial goals. Every situation is unique, which is what makes personal finance just that, personal.
A useful calculator I used to create this chart is the compound interest calculator at The Calculator Site. You can enter your own numbers there and better account for existing savings and personalized assumptions.
There are a number of different tools, resources and recommendations that can tell you if you are on track for retirement.
But, it really just comes down to this:
You need to be saving at least 15% of your pre-tax income. The earlier you want to retire, the higher your savings rate needs to be. The higher your savings rate, regardless of income, the sooner you can retire.
Need a place to build your savings? Be sure to earn the greatest return on your emergency savings by using a high yield savings account. Here’s a breakdown of the Best High-Yield Savings Accounts for 2020.