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.

Key Takeaways

  • A recent survey found that Americans believe they'll need $1.7 million to retire, but most people aren't saving enough to get there.
  • Experts say you'll need 80% of your pre-retirement income after you retire.
  • Divide your desired annual retirement income by 4% to find out how much you should save.
  • Know how much you need to save “by age” to help you stay on track and reach your retirement goals.

Recent research from Schwab Retirement Plan Services 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 go a long way toward creating shortfalls in your nest egg.

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. 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.

Manage Your Investments

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.

$1.7 million

The amount, on average, respondents in a recent Schwab survey said they need to retire.

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 your 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%.

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.

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.

15/25/50

To reach your goals, save 15% of your salary, beginning at age 25, with 50% invested in stocks.

Multiples 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 50% of 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 have trouble hitting that 50% mark by age 30. 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
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Another Multiple Formula

Another 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, 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

How Much Can You Save for Retirement?

The percentage of income left over (and available for savings) for workers between the ages of 25 and 74 averages 19.8% on a pretax basis. That's based on figures provided by the Bureau of Labor Statistics (BLS) in its 2015 “Consumer Expenditures Survey.”

This figure is well above the 15% savings formula—and potentially within the 25% figure, depending on how much comes from things like employer matching and debt repayment. The following is the average pretax percent of income left over after expenditures by age group:

  • 25 to 34: 19%
  • 35 to 44: 23%
  • 45 to 54: 27%
  • 55 to 64: 22%
  • 65 to 74: 8%

The Bottom Line

Given the savings potential of nearly 20% of gross income and an actual savings rate of less than 5% of disposable income, most Americans likely have room to boost their savings at most stages of their lives.

If you’re like most Schwab respondents, your 401(k) might be a good place to start. Upping your savings rate may even reduce financial stress, which mostly comes from worrying about saving enough for retirement, Schwab reports.

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%).

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.