How Much of Income Should Be Saved for Retirement?

by Wanda Thibodeaux

When you retire, you usually do not have the same amount of money coming in as when you were working. At the same time, you still need to meet your basic expenses. Saving for retirement thus is extremely important. How much you need to save, however, is a bit of a dilemma, because no two people have the exact same financial situation, and variables make calculating your needs difficult.

The Complex Calculation

Figuring out how much you need to save for retirement is no easy task, because so many variables impact finances. For example, you have to consider the annual income you have (which usually doesn't stay the same throughout life), whether you have a spouse who can contribute or who also will need funds, your desired standard of living, how old you currently are and the age at which you want to retire. Other factors include your life expectancy, your debts, the pre- and post-retirement investment returns, your expected Social Security payments, if any, your current savings, whether you'll have other income during retirement and inflation. All of these factors are interconnected in such a way that if one thing changes, you may need to revisit your other figures, as well.

The Goal

According to the Internal Revenue Service, it can take up to 80 percent of your pre-retirement income to retire comfortably at the same standard of living you had prior to retirement. The U.S. Department of Labor expands this figure 10 percent in both directions. It claims that those with higher incomes will need around 70 percent, while low-income individuals may need up to 90 percent. However you mix and match funds from various sources for retirement savings, the total should be in this range.

Some Guidelines

An old rule of thumb for retirement saving is that you should put away at least 10 percent of your income. Walter Updegrave of CNN Money recommends raising that target to 15 percent. However, this rule of thumb does not take any variables into account. It is simply a recommendation that has been repeated so many times that it has been accepted as the general guide. It is a good starting point. Rande Spiegelman of Charles Schwab recommends thinking about how much you want to spend during your first retirement year and then aiming for a portfolio roughly 25 times that amount.

Social Security

Social Security is a major consideration in retirement planning because it is income designed specifically for the retirement years. However, as Spiegelman points out, Social Security accounts for only 25 percent of your retirement income needs. You'll need to put in the other 75 percent yourself. Furthermore, when you take Social Security is a consideration. The longer you wait, the larger your payouts will be. Another consideration is government policy. It's possible that a future U.S. Congress could decide to raise the eligibility age for Social Security or reduce benefits.

When You Start Saving

When you start saving for retirement is one of the biggest factors influencing how much you have to put away each year. Using some basic assumptions, such as the fact you haven't saved for retirement before and that you'll retire at age 65, Spiegelman concludes that you'll need to save 10 to 15 percent of your income in your 20s. For each decade, this percentage rises by 5 to 10 percent. Thus, if you haven't started saving by the time you are 45, you'll need to put away 35 percent or more. Doing that is not financially possible for many people, given their monetary obligations and emergencies.

About the Author

Wanda Thibodeaux is a freelance writer and editor based in Eagan, Minn. She has been published in both print and Web publications and has written on everything from fly fishing to parenting. She currently works through her business website,, which functions globally and welcomes new clients.

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