How Much Do You Need to Save for Retirement?

how much do you need to save for retirement

Last year, more than 20% of adults in the US had less than $5,000 saved for retirement. 

It's fairly obvious that an amount this small isn't going to last very long. 

How much do you need to save for retirement? Is there a set amount or percentage of your salary that you should have put aside by the time you retire? 

Read on to learn more about saving for retirement right. 

15% Rule 

The 15% rule says that you should put 15% of your pre-tax salary aside every month as your retirement fund. 

Whilst this is a solid way to start saving for retirement, it does have its flaws. For instance, it assumes that you start saving from an early age. If you haven't started following this rule by the time you're 35, you won't have enough to retire on. 

It also fails to take into account fluctuations in your salary throughout your lifetime. 

80% Rule 

This rule states your retirement savings should be sufficient that you can draw down 80% of your final salary each year. 

So, for example, if you earned $80,000 a year when you retired, you'd need $64,000 per year from your retirement savings to carry on living in the manner to which you've become accustomed. 

This method doesn't take into account any other sources of income you may have when you retire, but it's a reasonable rule of thumb to follow. 

4% Rule 

The 4% rule is a way of calculating exactly how much money you'd need to have saved in order to achieve the 80% rule above. 

If you were aiming to earn $64,000 per year, you would take that figure and divide it by 0.04. This gives a total of $1,600,000. 

Assuming that interest rates remained at around 4% (which obviously isn't always the case!) you would then be able to earn the $64,000 you need to live off each year without eating away at your savings. 

The figures the 4% rule generates can feel pretty daunting. It's always worth speaking to financial advisors if you're concerned about saving enough for retirement. 

Salary Multiples 

Another simple way to estimate how much you should have put aside is to use multiples of your salary. 

A simple rule is to expect to have saved twice your annual salary by 40, four times your annual salary by 50, six times your annual salary by 60, and eight times your annual salary by the time you hit 65. 

Once again, this is a very rough and ready estimate, but it gives you some idea of whether or not you're on track with your retirement savings, and where you should be aiming for. 

How Much Do You Need to Save for Retirement? It Depends! 

As you can see, there are many different schools of thought. How much do you need to save for retirement? It's really dependent on your personal circumstances. 

The important thing to remember is that the sooner you start saving, the more interest you can make on your savings to retire right. So start ramping up your retirement savings now.

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