How Can You Determine How Much You’ll Really Need?

One guideline that is often cited is the “Rule of 25,” which says you should multiply your total annual expenses by 25 to determine how much you’ll need to have saved by the time you retire. So if you plan to spend $50,000 per year in retirement, you’ll need to save $1.25 million. To have $100,000 per year to spend, you’ll need $2.5 million, and if you want to live on $150,000 a year, you’ll need $3.75 million saved. If your number is $250,000 a year, you need to save $6.25 million. And so on.

The Rule of 25 is a good starting point, but it is not an ironclad, one-size-fits-all solution for everyone. You’ll need to factor in the impacts of inflation and healthcare costs, among other expenses, all of which suggest you should err on the side of saving more rather than less, for as long as you can.

Related: Retired? Here Are 17 No-Cost Ways to Make Money on the Side


A Little Late

You’re 54 and you’ve saved sporadically over the course of your career. All told, you’ve got $50,000 in savings, most of it in your bank account, and because of your laissez faire attitude toward your investments, you don’t expect to ever earn more than 4%. As a talent agent in Los Angeles, you’re self-employed and have never bothered to set up a retirement account. You make $100,000 and your spouse makes $70,000 for a total of $170,000 a year, and you’ve already agreed that you will both keep working until you hit 70.

When you do retire, however, you’re going to live lavishly—smoked salmon for breakfast, choice cuts of steak for dinner. Bad news: to pull all of that off, you’ll need to save $2,907 every month from now until you retire. That’s about 20% of your monthly income. Compare that to the 5% per month you’ve been saving up until now. If you stay on that course, you’ll have a savings shortfall of $660,000 when you retire.

Why Use Annuities?

Annuities are the only retirement plans that can provide a fixed income for life on a guaranteed basis. After researching different types of annuities, we have determined what a retirement nest egg can buy in the future and how much retirement savings are needed to reach your retirement goals using this particular investment strategy.

Note: Our calculations below do not include Social Security Benefits.

Annuity Basics

In this video, you will get a brief overview of how annuities work. You will learn about the different types of annuities, how they are taxed, and the benefits that they can provide. You will also get a brief overview of the different types of investment options available with annuities.

Understanding Lifetime Income Riders

A lifetime income rider is an annuity benefit that provides you with an opportunity to receive regular payments for the rest of your life. While there are many different types of annuities, they all share the same goal – to provide you with retirement income so that you can live comfortably after you stop working.

To recap, annuities can offer a lifetime income stream similar to a pension plan. A pension is a type of annuity.

You purchase an annuity contract with an income benefit with either a lump sum or a series of payments, including your current savings, traditional IRA, 401(k), and other retirement plans. Then, when retirement age begins, that annuity distributes a paycheck to you for the rest of your life as if you were still working, even after the account has run out of money.

3. Consider other sources of income while retired

There are multiple savings vehicles and income streams to consider for retirement. These can affect how much you need to save today, depending on which sources of income are available to you.

Social Security benefits are offered to retirees aged 62 or older (or those who become disabled or blind), who have earned enough credits throughout their career in order to qualify for the program. This can provide a steady income stream in retirement. For example, someone born in 1970 who earns $60,000 per year can retire at age 67 with $1,999.00 in monthly Social Security benefits. That’s nearly $24,000 per year that your retirement savings will not need to cover.

A pension plan can also provide you with a steady, monthly income stream. If your employer has one, you’ll need to ask if you qualify, how much income this will offer, and what the pension requirements are.

Annuities are another retirement income source to consider. They’re offered by insurance companies and act as a long-term investment vehicle. After purchasing an annuity — either with a lump sum or periodic purchase payments — you will receive regular payments over the course of your retirement.

A 401(k) is one of the most popular retirement savings options. These employer-sponsored investment vehicles allow you to save and invest as much as $20,500 per year (in 2022) — or as much as $27,000, if you’re over the age of 50 — toward your retirement.  The money in a 401(k) can be invested in a variety of different securities, and your contributions may even be matched by your employer, amplifying your efforts. Funds can be distributed without penalty beginning at age 59 ½, or earlier with certain exceptions.

An IRA, or individual retirement account, can be opened at any number of financial institutions, including banks, credit unions , and brokerages. There are two primary types: the traditional IRA and a Roth IRA. Each offers its own tax advantages, depending on your specific situation. For 2022, individuals can contribute up to $6,000 into an IRA annually, which can be invested in various securities and even real estate. If you’re over 50, you can put up to $7,000 into an IRA each year.

There are other plans and investment options available, but these five are the most common among retirees.

How Much Do I Need To Retire At 62?

According to our retirement calculator, if you want to have $100,000 a year for the rest of your life starting when you’re 62 years old, you’ll need to save a certain amount of retirement savings today. This amount is guaranteed, and you’ll receive it through an annuity.

Today’s AgeDeposit AmountRetirement AgeAnnual Payment

Keep in mind all of the income sources that can help cover your expenses

As you explore how much money you might really need in retirement, remember that the amount you decide to save and invest on your own is only one component of your future retirement income.Most Americans will have Social Security as the backbone of their retirement savings. (Even if benefit payments are reduced in the future, Social Security is not likely to go away.) And don’t forget about other sources of income that may be available to you many years from now, including the money in your workplace and personal retirement accounts, pensions, annuities, proceeds from selling your home or business, rental income or an inheritance.

So how much income do you need?

The reason you don’t need to replace 100% of your pre-retirement income is that when you retire, you’re typically able to eliminate certain expenses. For example:

  • You’ll no longer have to save for retirement (obviously).
  • You might spend less on commuting expenses and other costs related to going to work.
  • You may have paid off your mortgage by the time you retire.
  • You may not need life insurance if you no longer have dependents.

But retiring on 80% of your annual income isn’t perfect for everyone. You might want to adjust your goal up or down based on the type of retirement lifestyle you plan to have and if your expenses will be significantly different.

For example, if you plan to travel frequently in retirement, you may want to aim for 90% to 100% of your pre-retirement income. On the other hand, if you plan to pay off your mortgage before you retire or downsize your living situation, you may be able to live comfortably on less than 80%.

Let’s say you consider yourself the typical retiree. Between you and your spouse, you currently have an annual income of $120,000. Based on the 80% principle, you can expect to need about $96,000 in annual income after you retire, which is $8,000 per month.

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 a few useful formulas that can help you set age-based savings goals on the road to retirement.

Percentage of Your Salary

To begin to figure out how much you need to accumulate at various stages of your life, it can be useful to think in terms of saving a percentage of your salary.

Fidelity Investments suggests saving 15% of your gross salary starting in your 20s and lasting throughout the course of your working life. This includes savings across different retirement accounts and any employer contributions if you have access to a 401(k) or another employer-sponsored plan.

How Much to Save for Retirement by Age

Fidelity also recommends the following benchmarks—based on a multiple of your annual earnings—for how much you should have saved for retirement by the time you reach the following ages:

Target Retirement Savings by Age  Age  Annual Salary  30  1x annual salary  40  3x annual salary  50  6x annual salary  60  8x annual salary  67  10x annual salary Source: Fidelity

An Alternative Formula

Another, more heuristic 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 don’t forget that it includes not only 401(k) holdings and matching contributions from your employer, but also other types of retirement savings.

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 such as the job loss many experienced during the COVID-19 pandemic.

How Much Should I Save for Retirement Each Year?

One rule of thumb is to save 15% of your annual earnings. In a perfect world, savings would begin in your 20s and last throughout your working years.

How Much Do I Need to Save for Retirement?

2019-2020 Federal Reserve SCF data also shows us the average retirement savings by age in the U.S.: •    Ages 18-24: $4,745.25 •    Ages 25-29: $9,408.51 •    Ages 30-34: $21,731.92 •    Ages 35-39: $48,710.27 •    Ages 40-44: $101,899.22 •    Ages 45-49: $148,950.14 •    Ages 50-54: $146,068.38 •    Ages 55-59: $223,493.56 •    Ages 60-64: $221,451.67 •    Ages 65-69: $206,819.35

Saving for Retirement: Where Are You Now?

Whether you plan to live lavishly or frugally, you’ll need to have a certain amount of money saved by the time you retire. Think of this figure as a mountain summit, reachable by several different paths. If you’ve done everything right so far, that summit is still in plain view; you’ve followed the most direct and least difficult path, and all you need to do is continue on in the same direction. If, however, your savings aren’t where they should be, it’s as if you’ve wandered in the wrong direction—you’ll need to recalibrate and start climbing in order to reach the summit.

To determine your current financial coordinates, you need to answer three questions:

  • How much have I saved thus far?
  • How many years until I retire?
  • What’s my annual income (and how much of that do I want to replace)?

The answers to those questions will determine how much work you have to do to reach that mountaintop. If you’ve saved plenty and you’re still young, great—you’re well on your way. If you’ve saved nothing and your sixties are just around the corner, not so much. Let’s check out some examples using our retirement calculator to see how this works in reality.

Saving for retirement is different for everyone

There is no one-size-fits-all approach to saving for retirement. Everyone’s needs will be different, and so will their approach to saving, including when they start and how much they can set aside each year. Consulting with a certified financial planner or other retirement expert is really the best way to understand your unique needs.

“Planning ahead and checking in on your efforts” is key to saving enough for the retirement years, Ludwick says.”It’s dangerous when you’re 75 and realize you’re running out of money and you have to move in with a younger sibling or something.” 

His advice? “If you want to stay independent, do your homework ahead of time. Think about all those things that could possibly happen. If they don’t happen, you’re lucky … and your kids and grandkids can have a nice gift that you leave behind.”

1. When you plan to retire

The age you plan to retire can have a big impact on the amount you need to save, and your milestones along the way. The longer you can postpone retirement, the lower your savings factor can be. That’s because delaying gives your savings a longer time to grow, you’ll have fewer years in retirement, and your Social Security benefit will be higher.

Consider some hypothetical examples (see graphic). Max plans to delay retirement until age 70, so he will need to have saved 8x his final income to sustain his preretirement lifestyle. Amy wants to retire at age 67, so she will need to have saved 10x her preretirement income. John plans to retire at age 65, so he would need to have saved at least 12x his preretirement income.

Of course, you can’t always choose when you retire—health and job availability may be out of your control. But one thing is clear: Working longer will make it easier to reach your savings goals.

About the Author

Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert. 

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