How Much Should Go Towards Your Retirement Fund Annually?
Standard retirement planning advice says you should have 10 times your annual salary saved by the time you retire, and to get there, you should shoot for three times your yearly pay by age 40, six times by 50 and eight times by 60.
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But how big do your annual contributions need to be in order to reach those milestones?
GOBankingRates asked financial experts from a variety of backgrounds about how much savers should set aside every year to make sure they can retire comfortably no matter how much they earn. Here’s what they said.
Forget the Figure and Focus on the Percentage
According to a study from Northwestern Mutual, Americans think they will need $1.27 million to retire comfortably. Others say it’s more like $1 million and others say more or less than that.
Ignore them all.
“Someone accustomed to a millionaire’s income and lifestyle will need to plan for retirement with vastly different dollar amounts than someone living on a $60,000 annual salary,” said Joel Ohman, certified financial planner and CEO of InsuranceProviders.com. “Instead of dollar amounts, people should consider saving percentages of their income.”
So, what’s the right percentage? Conventional wisdom says socking away one dollar for every 10 will provide a happy, healthy retirement.
“Saving 10% of your income is an excellent goal for working individuals of all ages,” said Ohman.
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Your Percentage Will Vary Depending on When You Start Saving
The industry standard is a good starting point as a general guideline, but it presumes consistent contributions throughout your working life.
“The general advice has been to save 10-15% of your income,” said Dennis Shirshikov, professor of finance, economics, and accounting at the City University of New York and the head of growth at Awning, a site that helps people support their retirement through real estate investing. “But there are numerous factors to consider — age, current savings, desired retirement lifestyle, and so on.”
Because of the extended time period that compounding needs to work its magic, age is the most important among those variables.
“Younger individuals can aim for the lower end, while those closer to retirement should target the higher range,” said estate planning attorney Celeste Robertson, founder of the Law Office of Celeste Robertson.
Ohman agrees based on his observation of a common pattern.
“Typically, people will make less and save less in their 20s than in their 50s,” he said.
But many don’t save at all in their 20s — or even their 30s and beyond. Those who get a late start will have to save much more than 10% to make up for lost time and compounding. But those who are still young have a golden opportunity to keep their annual contributions low for life and still grow a fat nest egg.
“Consistency matters more than a fixed dollar amount,” said Robertson. “Remember, starting early and staying disciplined greatly contribute to long-term financial well-being.”
Life Happens — Expect Your Percentage To Change Over Time
If you start young, 10% will probably cut it. If you put off saving until middle age or later, it probably won’t.
But no matter when you begin building your nest egg, your income, life circumstances and retirement goals are sure to change along the way — and your percentage should change with them.
“Revisit regularly,” said Shirshikov. “I know a couple, the Martins. When they first started planning for retirement, they set aside 10% annually. But as their kids moved out and their mortgage was paid off, they found they could contribute more. So, every few years, they reassessed and upped their contributions.”
How You Save Will Play a Big Role in How Much You Need
Many people increase their percentage to take advantage of catch-up contributions to their retirement funds, which the IRS allows starting at age 50 — but you might be able to get away with contributing less over time by choosing the right kinds of accounts from the start.
“Health savings accounts (HSAs) are something not everyone thinks about,” said Shirshikov. “If eligible, they’re triple tax-advantaged and can be a supplement to your retirement savings. Also, consider after-tax contributions to a 401(k), which can later be rolled into a Roth IRA, offering a tax-free source of income in retirement.”
It’s Your Percentage — Only You Can Calculate It
Just as a dollar figure like $1 million is an arbitrary goal for retirement planning, so is a fixed percentage like 10% or 20% of your income.
“As for annual savings contributions, the amount depends on workers’ expected lifestyle and future income sources,” said Dr. Barbara O’Neill, Ph.D., CFP, AFC, CRPC, a financial expert with more than 40 years of experience, expert reviewer for RetireGuide.com, distinguished professor emeritus at Rutgers University and CEO of Money Talk.
O’Neill said to consider the following factors when calculating your percentage:
Social Security
Pension
Rent
Part-time work
Current income
Desired retirement lifestyle
Projected life expectancy
Investment risk tolerance
Use a Retirement Calculator To Crunch the Numbers
Those factors are a lot to consider — but the good news is that you don’t have to guess.
“The best way to determine how much to save annually is to try several online calculators,” said O’Neill. “Compare the data outputs and the assumptions used and look for commonalities in the results.”
She offered the following recommendations:
Calculator.net Retirement Calculator: “This calculator has eight required fields, with variables listed above, and three optional fields,” said O’Neill.
Charles Schwab Retirement Calculator: “This calculator asks for over a dozen inputs and presents an analysis using text and bar graphs,” O’Neill added.
FINRA Retirement Calculator: She said, “This calculator includes 12 fields to input data and an option to adjust deposits for inflation.”
Vanguard Retirement Income Calculator: “This calculator uses a fill-in-the-blanks format for users to input data for key variables listed above,” said O’Neill.
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