Planning for retirement is one of the most significant financial goals you'll undertake in your lifetime. Determining how much to save can feel overwhelming, but with careful planning and consideration, you can set yourself up for a comfortable and secure retirement. This guide will help you break down the factors to consider when calculating your retirement savings target.
 

The 80% Rule of Thumb

A common guideline is the "80% rule," which suggests you aim to replace about 80% of your pre-retirement income to maintain your current lifestyle. For example, if you earn $65,000 each year, you'll need about $52,000 per year in retirement. This estimate assumes that some expenses, like commuting costs and work-related expenses, will decrease. However, it’s essential to tailor this rule to your unique circumstances.
 

Factors to Consider

When it comes to saving for retirement, here are the main things to consider.

Desired Lifestyle in Retirement
Your retirement savings goal depends significantly on the lifestyle you envision. Will you travel extensively, downsize to a smaller home, or relocate to a more affordable area? These decisions will impact your annual spending and, consequently, the total savings you'll need.

Retirement Age
The age at which you plan to retire influences how much you need to save. If you retire early, your savings must cover more years, increasing your total target. On the other hand, retiring later reduces the number of years you'll need income, potentially lowering the amount you need to save.

Life Expectancy
While no one can predict exactly how long they'll live, planning for a longer life is important. Many financial planners suggest estimating for a lifespan of 90 years or more to ensure you don’t outlive your savings.

Healthcare Costs
Healthcare expenses often increase as you age. While Medicare covers some costs, it doesn’t cover everything, and long-term care can be a significant expense. Researching supplemental insurance and planning for potential healthcare costs is important.

Inflation
The cost of living tends to rise over time due to inflation. Even modest inflation can significantly decrease the purchasing power of your savings. It’s important to factor in an average annual inflation rate of about 2-3% when planning how much to save for retirement.

Setting a Savings Target

It’s helpful to set a savings target for your retirement goals. Having a set goal will help motivate you and also let you know how much farther you need to go.

Use Retirement Calculators
Retirement calculators can help you estimate your savings needs by considering factors like your current age, income, desired retirement age, and expected expenses. Many online tools allow you to adjust these variables to create a customized plan. You can try any of our free, online retirement calculators.

The 4% Rule
The "4% rule" is a helpful guideline for determining how much you can withdraw annually from your retirement savings without running out of money. It suggests if you save 25 times your annual retirement spending, you can withdraw 4% each year. For example, if you need $52,000 annually, you’ll need $1.3 million saved ($52,000 x 25).

Employer Contributions and Social Security
Consider all sources of retirement income, such as Social Security benefits, pensions, or employer-sponsored retirement plans. Employer contributions to 401(k) plans, for instance, can significantly boost your savings. Ensure you’re taking full advantage of any employer match programs.

You can also open your own Individual Retirement Account (IRA), which is a tax-advantage^* savings account the helps you save for retirement.

Strategies for Saving

Once you have a savings goal, it’s time to put some strategies in place to reach your goal.

Start Early
The earlier you start saving, the more time your investments have to grow due to the power of interest. Even small contributions made early can lead to significant growth over time.

Save Consistently
Aim to save at least 15% of your income for retirement, including employer contributions. If you’re starting later in life, you may need to save a higher percentage.

Invest Wisely
Choose a diversified investment portfolio aligned with your risk tolerance and timeline. As you approach retirement, consider shifting to more conservative investments to protect your savings. Monitor and Adjust Regularly review your retirement plan and adjust as needed. Life changes, market fluctuations, and evolving goals may require you to readjust your savings strategy.

Determining how much to save for retirement involves careful consideration of your lifestyle, age, life expectancy, and other factors. While rules of thumb like the 80% rule and 4% rule provide a starting point, personalizing your plan will help it work for you. By starting early, saving consistently, and leveraging all available resources, you can build a secure financial future and enjoy a fulfilling retirement.

^*Consult tax advisor for advice.