How Much Should You Really Save for Retirement?

Every piece of personal finance says you must save for retirement. But let’s be honest. With retirement being 30-40 years off, it’s really easy to put off and think “eh, I’ll figure out my retirement plan next year.” I get it. I mindlessly save what I can, but I’m not really sure exactly what I’m saving for and if I’m saving enough to have a lifestyle I will enjoy once I retire.

Experts advise saving 10-20% of your income for retirement, but what exactly is that going to get me in 40 years? Is that enough to be cruising around the world in my golden years, or am I going to be just barely scraping by? Retirement guidelines feel a little vague, intangible, and just plain uninspiring. Which is why many of us may avoid understanding exactly how much we really need to save.

To try and get a bit more clarity around exactly how much I should be putting away each month for retirement, and to try to get a bit more excited about what I’m saving for, I worked through these three questions:

1. What do you want your retirement life to look like?

I know, I know. It’s really hard to imagine what retired life will look like. That’s just so far away! To help give this some perspective, I thought about the range of retired people I know and which of their lifestyles appeals to me most.

The amount of money you’re going to need to have saved will vary greatly depending on these lifestyle goals. Are you planning to be that lady who is cruising around the world on the Queen Mary? Do you want to live in a bustling city with a lot of culture, but a high cost of living? Or do you envision living a quieter life hanging with your friends and family? You can estimate these costs and get a pretty good idea of how much you’ll want to spend monthly once you’re retired.

Having a goal and understanding the cost will help you to really make a plan for how much you should save. It will also help to make the idea of retirement a little more tangible and something that you don’t continue putting off.

2. When do you want to retire?

This was the hardest question for me. I have no idea when I want to retire. I like working and I like to think I’ll continue working for a long, long time. That said, I don’t necessarily want to have to work when I’m 70—I’d like the option to step back at an earlier age.

So with this question don’t necessarily think of exactly when you’d like to retire, but when you’d like the option to slow down. If you’re in a high stress or labor intensive job, factor in that you may not be able or be willing to perform at that level forever, and you may want to have the option to retire a little sooner. If you’re married, have this conversation with your spouse so you don’t have completely different expectations as to when you will retire.

3. How risky are you?

According to conventional financial wisdom, the younger you are, the riskier you can afford to be with your retirement investments. In reality, this doesn’t mean you should follow that exact guideline if you’re not comfortable with a riskier investment portfolio. 

Knowing how risk tolerant or risk adverse you are isn’t an exact science, but you can generally expect to see slightly lower returns if you’re risk adverse with your investments (but if that’s what is going to help you sleep better at night, it’s good to know). If you’re going to feel more comfortable investing your nest egg in more stable investments that offer a lower return, be honest when you’re calculating your retirement needs and picking the right retirement plan—it will affect how much you need to save. 

There are a lot of options you can invest in as you look to retirement: traditional index funds are often used as people want to grow their investments steadily over the long term. There are also alternative investments, such as real estate, that help people to still earn income once they are no longer earning a paycheck. 

Now that you’ve thought through those questions, there is some basic math you can do before you move to trying out retirement calculators. I do love retirement calculators to give me exactly what I need to be saving each month, but if you understand some of the basics, it will give you a deeper understanding of how to use the calculators to give you the most precise number.

The common advice is that you’ll need an 80% income replacement rate during retirement, meaning that you’ll still need a monthly income equal to 80% of your current income during retirement.  The idea is that you’ll need less because your house is likely paid off and you’re kids are out of the house. This income can come from retirement savings, investment income (from annuities, real estate, etc), and from any pension or social security payments.

So if your income is $75,000 per year, you’ll need $60,000 per year in retirement according to this rule ($75,000*80%).

Another piece of common advice is the “multiply by 25 rule.” This isn’t very exact, but it starts to give you a general idea of how much you need to have set aside to retire. With this advice, if you want to withdraw $60,000 per year in retirement, you’ll need to have $1,500,000 million saved by the time you retire ($60,000*25)!

That seems like a huge amount, but this is when I like to bring in the retirement calculator to help me figure out exactly what I need to save each month. We could pull out some fancy math here, but let’s leave that to the professionals.

My absolute favorite retirement calculator is from Nerd Wallet. I love it because it gives you basic options, so you’re not overwhelmed with details. But it also gives you some advanced options that you can play with, especially if you want to go a little deeper with information and assumptions.

Once you do the basic calculation you’ll get an idea of whether your current savings rate is on track with your goals, or whether you need to step it up a little to make sure you’ll be able to afford that goal of an around the world adventure. When you’ve settle on the right amount for you to save right now, it’s time to find the best retirement investment for your situation and start saving!