Thinking about how much money you need to save for retirement can be scary and overwhelming. It doesn’t have to be, though — not if you have some guidelines to help you get there.
You can use tax-advantaged retirement accounts to amplify the benefits of compounding and apply a formula related to age and income to help you to set aside the money necessary to meet your retirement goals.
Keep in mind, though, that you’ll have to consider the age at which you plan to retire, the type of lifestyle you’d like in retirement and your current income and lifestyle when planning to save for retirement.
Retirement savings at a glance
In the following chart, we outlined how much you should have saved at different ages to meet certain retirement savings goals if you were to rely only on the power of compounding. We assume a retirement age of 65 years old, a compounding rate of 10% — the historical average annual return for the S&P 500 — and no additional contributions.
For example, to have $250,000 by the age of 65, you would have to have saved about $5,525 by age 25. Assuming a compounding rate of 10% annually, that $5,525 could grow to $250,000 over 40 years.
| Retirement savings goal by 65 | 25 | 30 | 40 | 50 | 60 |
|---|---|---|---|---|---|
| $250,000 | $5,525 | $8,900 | $23,075 | $59,850 | $155,250 |
| $500,000 | $11,050 | $17,800 | $46,150 | $119,700 | $341,525 |
| $1 million | $22,100 | $35,750 | $92,300 | $239,400 | $621,000 |
| $1.5 million | $33,150 | $53,500 | $138,500 | $359,100 | $931,400 |
| $2 million | $44,250 | $71,500 | $184,600 | $479,000 | $1,242,000 |
| $2.5 million | $55,250 | $89,000 | $230,750 | $598,500 | $1,552,500 |
| $3 million | $66,500 | $107,000 | $277,000 | $718,250 | $1,863,000 |
Source: Investor.gov, “Compound Interest Calculator”
As you can see in the chart, compounding can profoundly affect your retirement savings. Therefore, the earlier you start investing, the better.
Fidelity provides another set of age-based guidelines that, when taken into consideration with other factors, should help give you a rough idea of how much you should have saved at different ages.
When you are 25, you’re likely in the early stages of a career and saving money can be a bit more challenging, especially if your income isn’t very high yet. Therefore, try to find ways to reduce your overhead costs so you can save more money. For instance, reduce expenses by living with roommates.
Though it may be more difficult to save large amounts as you’re kicking off your career, it’s important to prioritize retirement savings as early as possible to maximize the power of compounding. Based on our compounding chart, a savings balance of $5,525 by 25 can grow into six figures by the time you reach retirement.
By 30, you may have started earning a bit more money. If you don’t yet have a mortgage or children, this could be a great time to max out your retirement contributions. The IRA contribution limit for 2023 is $6,500, while the 401(k) contribution limit sits at $22,500.
According to Fidelity, you should have 1x your salary saved by this age. In other words, if you’re making $53,500 per year at 30, you should have the same amount stored away in a retirement account.
According to the table above, you should be well on your way to saving over $1.5 million by the time you’re 65 if you have $53,500 in your retirement account at age 30.
At 40, you may be hitting the beginning of some of your prime earning years. For example, U.S. Bureau of Labor Statistics (BLS) data shows that the median weekly earnings for individuals 35 to 44 years old was $1,223 in the first quarter of 2023. This grew to $1,239 per week for ages 45 to 54 years old before declining.
Fidelity recommends to have 3x your salary put away in retirement savings by now. So, if your salary is $63,596 — the median yearly earnings for workers from ages 35 to 44 according to the BLS — then you should have $190,788 saved. If you do, you may be on your way to having over $2 million saved for retirement based on compounding.
Fidelity recommends you have 6x your salary saved by 50, which means the ratio of how much you earn to how much you have saved really begins to increase.
If you are making $85,000 per year at this age, Fidelity’s recommendation is to have $510,000 saved. According to the chart above, you’re on pace to have between $2 and $2.5 million saved for retirement with this much stashed away.
By age 60, you’ll be nearing retirement. At this stage, Fidelity recommends you have 8x your income saved to maintain your current lifestyle in retirement.
This means that if you’re making $100,000 per year by 60, you should have $800,000 saved to reach your retirement goals by 65. If you were to have $800,000 saved at age 60, five years of compounding could give you between $1 and $1.5 million saved for retirement.
The amount of money you’ll need to retire largely depends on the lifestyle you’d like to have once you retire.
According to the Employee Benefit Research Institute’s 2022 Spending in Retirement Survey, American retirees spend the majority of their retirement dollars on housing (30%), with food expenses (25%) coming in a close second.
In determining how much you think you’ll need to retire, you might consider applying the 4% rule for retirement withdrawals.
This rule, created by financial advisor Bill Bengen in 1994, has been a frequently used guideline to determine how much you can spend in retirement without running out of money. The rule states that retirees can safely withdraw 4% of their retirement savings in the first year and then adjust for inflation in each succeeding year, with a high probability that they won’t outlive their money.
A recent Morningstar study puts the safe annual withdrawal rate over a 30-year time horizon closer to 3.8%. During an interview on the Bogleheads Live podcast in December 2022, Bengen said he has since adjusted his rule to 4.7%.
To get an idea of your annual retirement income based on the original rule for the sake of simplicity, multiply the total amount of your retirement savings by 4%.
For example, if you have $1,625,000 saved for retirement, the rule states that you can safely withdraw $65,000 ($1,625,000 x 4% = $65,000) in the first year of retirement. If inflation climbs 4%, you’d give yourself a 4% raise the next year. In year two, then, you would withdraw $67,600 ($65,000 + $2,600 = $67,600).
The assumption with the 4% rule is that you’ll live 30 years as a retiree. But if life expectancies continue to increase, as they have, this rule might not so readily apply.
How American retirees spend their retirement dollars
| Expense | Average monthly spending |
|---|---|
| Housing | 30% |
| Food | 25% |
| Health | 13% |
| Transportation | 12% |
| Entertainment | 8% |
| Clothing | 7% |
| Other | 6% |
Source: Employee Benefit Research Institute’s 2022 Spending in Retirement Survey
For those new to saving for retirement, here’s how to get started. The following are some of the initial steps you might take:
If you feel you’d like to have more saved for retirement than you currently do, there are some ways you can catch up.
If your company offers a 401(k) match, do your best to contribute at least as much as they’ll match. For example, if your company matches your contributions dollar-for-dollar up to 5%, then do your best to contribute at least up to that 5%. So if you make $50,000 per year, try to contribute $2,500 ($50,000 x 5% = $2,500) to your 401(k). Your company will also contribute $2,500, and that’s free money you don’t want to leave on the table.
While matching funds are typically reserved for employer-sponsored retirement plans, some IRA custodians offer new account incentives. For example, Robinhood matches 1% for every dollar you invest in your Robinhood IRA. If you’re under the age of 50 and max out your IRA contributions at $6,500 in 2023, Robinhood will contribute $65 to your account. That $65 might not seem like much at first thought, but it will compound and grow over time.
Furthermore, you have until the tax filing deadline to max out your IRA for the previous year.
When estimating how much money you’ll need to have saved, it’s important to account for the other sources of income you may have in retirement.
Figuring out how much to save for retirement can be challenging. However, there are many expert guidelines to help you estimate how much money you may need and help you set and track your retirement savings goals.
And remember, even if you haven’t started saving yet, today is always a good time to start. The earlier you invest, the more time your money has to compound.
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