A key part of retirement planning is to answer the question: "How much do I need to retire?" The answer varies by individual, and it depends largely on your income now and the lifestyle you want in retirement. Research published by Schwab Retirement Plan Services in 2019 illustrates two things. First, 401(k) participants believe they need $1.7 million, on average, to retire. And second, many are not on track to get there.

Why is that the case? There may be multiple causes. But not knowing how much to save, when to save it, and how to make those savings grow can create shortfalls in your nest egg.

Key Takeaways

  • How much you need to save for retirement depends largely on your current income and the lifestyle you want when you retire.
  • Many Americans aren't saving enough.
  • Knowing how much you need to save “by age” can help you stay on track and reach your retirement goals and there are a few simple formulas that you can use to come up with the numbers.

Saving vs. Investing

Schwab research shows that most people—64%—see themselves as savers, not investors. As a result, 54% of 401(k) participants tend to put additional retirement funds in a savings account instead of another investment account such as an IRA, brokerage account, or health savings account (HSA). The trouble with this strategy is that savings accounts typically pay much lower returns (or nothing at all) compared to investment accounts.

When it comes to 401(k) accounts, many people take a "set it and forget it" approach to saving and investing, according to the Schwab study. A third of the study participants who auto-enrolled in their 401(k) plan have never increased their contribution level. And 44% have never made a change to their investment choices.

You need to pay attention to and actively manage a 401(k) to really make it grow. That also applies to other investment accounts, including IRAs, brokerage accounts, and HSAs. To accomplish this, you likely will benefit from professional help. In fact, 95% of Schwab survey participants said they would be "somewhat" or "very" confident about making investment decisions with help from a pro versus 80% if they had to do it on their own.

In the early and middle years of your career, you have time to recover from any losses. That's a good time to take some of the risks that allow you to earn more with your investments.

How Much Do I Need to Retire?

Most experts say your retirement income should be about 80% of your final pre-retirement salary. That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.

This amount can be adjusted up or down depending on other sources of income, such as Social Security, pensions, and part-time employment, as well as factors like your health and desired lifestyle. For example, you might need more than that if you plan to travel extensively during retirement.

Retirement Savings: The 4% Rule

There are different ways to determine how much money you need to save to get the retirement income you want. One easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the 4% rule.

To generate the $80,000 cited above, for example, you would need a nest egg at retirement of about $2 million ($80,000 ÷ 0.04). This strategy assumes a 5% return on investments (after taxes and inflation), no additional retirement income (i.e., Social Security), and a lifestyle similar to the one you would be living at the time you retire.

The 4% rule does not work unless you stick to it year in and year out. Straying one year to splurge on a big purchase can have major consequences, as this reduces the principal, which directly impacts the compound interest that a retiree depends on to sustain their income.

Retirement Savings by Age

Knowing how much you should save toward retirement at each stage of your life helps you answer that all-important question: “How much do I need to retire?” Here are two useful formulas that can help you set age-based savings goals on the road to retirement.

Percentage of Your Salary

To figure out how much you should have accumulated at various stages of your life, it can be useful to think in terms of a percentage or multiple of your salary.

Fidelity suggests you should have an amount equal to your annual salary in accumulated savings by age 30. This requires saving 15% of your gross salary beginning at age 25 and investing at least 50% in stocks.

Interestingly, half of the participants in the Schwab study said they contributed 10% or less of their income to their 401(k)s. Unless some combination of an employer match, additional savings, and debt repayment makes up the difference, those study respondents may fall short. Additional savings benchmarks suggested by Fidelity are as follows:

  • Age 40—two times annual salary
  • Age 50—four times annual salary
  • Age 60—six times annual salary
  • Age 67—eight times annual salary

A More Aggressive Formula

Another, more aggressive formula holds that you should save 25% of your gross salary each year, starting in your 20s. The 25% savings figure may sound daunting. But keep in mind it includes not only 401(k) withholdings and matching contributions from your employer, but also the other types of savings mentioned above.

If you follow this formula, it should allow you to accumulate your full annual salary by age 30. Continuing at the same average savings rate should yield the following:

  • Age 35—two times annual salary
  • Age 40—three times annual salary
  • Age 45—four times annual salary
  • Age 50—five times annual salary
  • Age 55—six times annual salary
  • Age 60—seven times annual salary
  • Age 65—eight times annual salary

Whether or not you try to follow the 15% or the 25% savings guideline, chances are your actual ability to save will be affected by life events like those reported by Schwab participants. Those include home repairs (37%), credit card debt (31%), and monthly expenses (30%).

The Bottom Line

Many Americans likely have room to boost their savings at most stages of their lives. If you’re like most Schwab respondents, a 401(k) might be a good place to start if you have access to one. Upping your savings rate may even reduce financial stress, which mostly comes from worrying about saving enough for retirement, Schwab reports.

Sometimes you'll be able to save more—and sometimes less. What’s important is to get as close to your savings goal as possible and check your progress at each benchmark to make sure you're staying on track.

Since the importance of saving for retirement is so great, we've made lists of brokers for Roth IRAs and IRAs so you can find the best places to create these retirement accounts.