How Much Do You Need To Save for Retirement?

OLYMPUS DIGITAL CAMERASaving for retirement seems like a daunting task.  It is a combination of preparing for something that is a long ways away and a seemingly insurmountable task.  Both of these aspects keep people from saving like they need to if they want to have a comfortable retirement because people in general focus on the near-term wants and needs and give up when a task seems too difficult.  So people put it off, rationalize by saying that they would rather “live for today” or that somehow they’ll be alright when the time comes, and the years tick by until people find themselves ready to leave a job or being laid off in their fifties without prospects for finding a comparable job, but not having the savings needed to see them through retirement.  People then, who have always been able to provide for themselves, end up scrimping by on Social Security and aid from kind people or burdening adult children who are finding themselves needing to continue to support their own adult children.  The senior discount should not be your retirement plan.

It does not need to be this way, however.  A good rule-of-thumb for how much you’ll need for retirement is to take 75% of your current spending and multiply by 25.  For example, if you have a $60,000 per year job, pay $10,000 per year in taxes and health insurance,leaving a take-home pay of $50,000, you would need to have  0.75*$50,000*25 = $937,500 in savings by the time you retire to have a good chance of continuing your current lifestyle without depleting your savings before you die.  I would advise you have double that amount saved since it reduces your chances of outliving your money further and allows you to continue to invest about two-thirds of your savings in stocks when you retire, thereby increasing your retirement income and allowing you to thrive in retirement rather than just get by.  While it may seem impossible to save up millions of dollars to take you through 20 years or more of retirement, it can be easily done with a combination of starting early, saving regularly, and using common stocks to increase your return.

For example, someone starting out at 20 years old who puts just $300 per month, or just $3600 per year, away into a 401k or personal IRA and invests it entirely in stocks (in a set of low-cost mutual funds that are well diversified) should expect to get a return of about 8% after inflation over a 45 year working career.  Plugging this information into a financial calculator starting today, one gets:

Age Contribution Interest Balance
20 $0.00 $0.00 $0.00
21 $3,600.00 $288.00 $3,888.00
22 $3,600.00 $599.04 $8,087.04
23 $3,600.00 $934.96 $12,622.00
24 $3,600.00 $1,297.76 $17,519.76
25 $3,600.00 $1,689.58 $22,809.34
26 $3,600.00 $2,112.75 $28,522.09
27 $3,600.00 $2,569.77 $34,691.86
28 $3,600.00 $3,063.35 $41,355.21
29 $3,600.00 $3,596.42 $48,551.63
30 $3,600.00 $4,172.13 $56,323.76
31 $3,600.00 $4,793.90 $64,717.66
32 $3,600.00 $5,465.41 $73,783.07
33 $3,600.00 $6,190.65 $83,573.72
34 $3,600.00 $6,973.90 $94,147.62
35 $3,600.00 $7,819.81 $105,567.43
36 $3,600.00 $8,733.39 $117,900.82
37 $3,600.00 $9,720.07 $131,220.89
38 $3,600.00 $10,785.67 $145,606.56
39 $3,600.00 $11,936.52 $161,143.08
40 $3,600.00 $13,179.45 $177,922.53
41 $3,600.00 $14,521.80 $196,044.33
42 $3,600.00 $15,971.55 $215,615.88
43 $3,600.00 $17,537.27 $236,753.15
44 $3,600.00 $19,228.25 $259,581.40
45 $3,600.00 $21,054.51 $284,235.91
46 $3,600.00 $23,026.87 $310,862.78
47 $3,600.00 $25,157.02 $339,619.80
48 $3,600.00 $27,457.58 $370,677.38
49 $3,600.00 $29,942.19 $404,219.57
50 $3,600.00 $32,625.57 $440,445.14
51 $3,600.00 $35,523.61 $479,568.75
52 $3,600.00 $38,653.50 $521,822.25
53 $3,600.00 $42,033.78 $567,456.03
54 $3,600.00 $45,684.48 $616,740.51
55 $3,600.00 $49,627.24 $669,967.75
56 $3,600.00 $53,885.42 $727,453.17
57 $3,600.00 $58,484.25 $789,537.42
58 $3,600.00 $63,450.99 $856,588.41
59 $3,600.00 $68,815.07 $929,003.48
60 $3,600.00 $74,608.28 $1,007,211.76
61 $3,600.00 $80,864.94 $1,091,676.70
62 $3,600.00 $87,622.14 $1,182,898.84
63 $3,600.00 $94,919.91 $1,281,418.75
64 $3,600.00 $102,801.50 $1,387,820.25
65 $3,600.00 $111,313.62 $1,502,733.87

So with only $300 per month invested without ever increasing contributions and without adding anything for a company match, our retiree will have about $1.5 M in savings when entering retirement.  Add a little more and include a company match, and you could easily have $3M or more if you start putting money away in your 401K or IRA right when you start working.  Note that the balances grow very slowly during the first few years, but then grow very rapidly near the end once your money starts to compound, making interest from interest.

This chart can also be used to evaluate how you are doing right now versus where you need to be.  Just find your age and compare the balance shown against what you currently have saved.  If you are 40 years old, you should have around $200,000 saved if you want to have around $1.5 M at retirement and provide a yearly income of about $60,000 for expenses.  If you are 55, you’d need to have about $700,000 saved to be on track.  If you have less than this, it is time to start ramping up your contributions to reach your goals.  Once you get on track, or maybe ahead of the game a bit, you can ramp things back down because you’ll know your retirement is secure.  Then again, it isn’t a bad idea to be substantially ahead of the game so that you can take less risk with your investments when you are approaching retirement.  Shifting from stocks into bonds and interest-paying securities will reduce your risk of a market meltdown when you are 64 affecting your retirement date, but you will not get the kind of returns projected in this table from interest alone.

If you know there is no way you can save as much as needed, you can also look at the chart to see how much longer you may need to work beyond 65.  If you currently have $100,000 saved, you have the retirement savings of a 35-year-old.  If you are currently 40, you can reach $1.5 M in savings by putting $300 per month away into mutual funds by the age of 70.   If that sounds like a non-starter for you, it is time to look at your spending priorities in your life and find ways to increase your retirement savings.  Everyone has excuses, but just because you have good excuses for not saving for retirement doesn’t mean you’ll be just fine if you don’t.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Comments appreciated! What are your thoughts? Questions?

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