How much money you need to live financially comfortable during retirement varies widely depending on the individual. There are plenty of proposals on how much retirement savings you should have. Meanwhile, many of the free online calculators will show little agreement with one another. And while it’s difficult to forecast exactly what you’ll need during retirement there are benchmarks to aim for. 

The ideal savings rate varies by expert or study because making plans for the future depends on many unknown variables, such as, not knowing how long you’ll be working, how well your investments will do, or how long you will live, among other factors. 

Eric Dostal, J.D., CFP®, advisor at Sontag Advisory says that any calculation for retirement is an educated guess. “Saving for retirement is likely not the only financial goal you have on your plate," where there's things like opening a business or buying a home that you might be considering, he says.

What is possible, however, is to follow some key rules. For instance, you could assume that you’ll have a steady income until age 65. That’s exactly what drives many of the leading theories.

Key Takeaways

  • There are many unknown variables that make it difficult to accurately forecast retirement needs.
  • However, there are benchmarks based on historical data that provide ballpark figures.
  • Research says to save roughly 15% of your annual income, but those waiting until later in life to start saving will need to contribute more.  
  • It’s best to start saving early and take advantage of matching contributions in 401(k)s if offered.

How Much Should You Save?

Academic retirement saving studies use the term replacement rate. This is the percentage of your salary that you’ll receive as income during retirement. If you made $100,000 a year when you were employed and receive $38,000 a year in retirement payments, your replacement rate is 38%. The variables included in a replacement rate include savings, taxes, and spending needs.

The Center for Retirement Research at Boston College looked at how many people have to save to achieve a replacement rate of around 70%. That's the replacement rate needed to retire at a comfortable level, says the study's authors, the center’s director Alicia H. Munnell and her associates Anthony Webb and Wenliang Hou. The figures varied depending on whether someone was replacing an income that was low (80% replacement rate needed), middle (71%), or high (67%).

They found that individuals earning the average wage would have to save 15% of their earnings every year to meet a 70% replacement rate at age 65. The biggest factor in the calculations was an individual's age—when they started saving and when it ended. Start saving at 25 and you only need to earmark 10% of your annual salary to retire at 65, and if you wait until 70 to retire, you'd only need to save 4% annually.

The savings rate is much higher for those that start saving later. If you waited until age 45 to start saving, you would need to put aside 27% of your salary for retirement. For example, a 25-year old saving $5,000 annually for 43 years, achieving an average annual return of 8% on their investments will have $1.67 million at retirement, says Peter J. Creedon, CFP®, CEO of Crystal Book Advisors. Someone waiting until age 35 to start saving and only having 33 years to contribute to —at $5,000 a year and an 8% return—would have $730,000, he says.

In another study, Wade D. Pfau, CFA, professor of retirement income at The American College, found that historical data over nearly the past century indicate that a person would have to save 16.62% of their salary to retire 30 years after beginning the savings plan with enough money to fund a replacement rate of 50% from their "accumulated wealth." Unlike the Boston College researchers, Pfau didn’t include Social Security income or "any other income sources" in his 50% calculation. Adding in Social Security and, say, pension income would move the replacement rate significantly higher.

How to Invest, When to Withdraw

Pfau's research highlights two other important variables. First, he notes that over time the safe withdrawal rate—the amount you can withdraw after retirement to sustain your nest egg for 30 years—was as low as 4.1% in some years and as high as 10% in others. He believes that "we should shift the focus away from the safe withdrawal rate and instead toward the savings rate that will safely provide for the desired retirement expenditures."

Second, he assumes an investment allocation of 60% large-cap stocks and 40% short-term fixed-income investments. Unlike some studies, this allocation doesn’t change throughout the 60-year cycle of the retirement fund (30 years of saving and 30 years of withdrawals). Changes in the person’s portfolio allocation could have a significant impact on these numbers, as can fees for managing that portfolio. Pfau notes that "simply introducing a fee of 1% of assets deducted at the end of each year would increase the baseline scenario’s safe savings rate rather dramatically from 16.62% to 22.15%."

This study not only highlights the pre-retirement savings needed but emphasizes that retirees have to continue managing their money to prevent spending too much too early in retirement.

The Family Factor

These studies calculate savings for individuals, but what about families? Parents with young children may choose to save for their college—ideally at least $2,500 per year, per child, from birth—to cover the cost of a public university. Costs associated with children make saving for retirement even more daunting. 

But there’s good news: Needed retirement savings for a couple isn’t twice as much as an individual as couples share many significant expenses—a home, for example. This is one shortfall of the studies mentioned above. 

The Matching Contribution Bonus

For people who start saving early and take advantage of employer-sponsored plans, such as 401(k)s, hitting savings goals isn’t as daunting as it may sound. Employer matching contributions could significantly reduce what you need to save per month. These contributions are made pre-tax and it's the equivalent of "free money."

Say you save 3% of your income during a year and your company matches that 3% in your 401(k), "you will make a 100% return on the amount you saved that year," says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass.

The Bottom Line

There is no one-size-fits-all answer to how much you for retirement, but academic studies based on historical data can give you a ballpark figure. Aim to save around 15% of your annual salary if you’re early in your career. If you make $50,000 per year, save $8,000 per year or about $666 per month. This alone might seem like a tough task, but take advantage of employer matching and find new ways to reduce expenses. One of the big keys is that if you wait until later in life to start saving, you'll need to put away more of your salary. The sooner you start the better.