How Much of My Earnings Should I Be Saving for Retirement?

Is setting aside 10% of your income enough to get you through retirement? For many years, financial experts would've said yes. But with the cost of living rising for seniors and Social Security facing financial difficulties that could result in an across-the-board lowering of benefits in the future, there's a lot more pressure on workers today to save aggressively.

The new convention, in fact, is for pre-retirees to aim to set aside more like 20% of their earnings for their golden years. Doing so over time should, in theory, make for a comfortable retirement. But the percentage of your income that you set aside should actually be more of a personalized decision.

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How much of your income do you currently spend?

When we talk about setting aside 20% of our income to maintain our standard of living in retirement, that figure generally assumes that we're spending down our entire paycheck month after month. Now, let's be clear: Many Americans do indeed uphold that practice, which explains why they have little savings, loads of debt, and lots of stress. But if you earn a $100,000 salary and live on only half of that, then do you really need to be setting aside $20,000 a year for retirement? Maybe not, especially if you intend to live a similarly modest lifestyle when you're older.

On the other hand, if you're used to spending your entire $100,000 salary, then you'll probably want to be more generous with your retirement plan contributions. This especially holds true if you don't want to downgrade your lifestyle in any way once your career comes to a close.

What does retirement look like for you?

Maybe you don't want to retain your large home with high property taxes in retirement. Maybe you're willing to downsize, or unload a vehicle if your household currently pays to own two. When we think about what we're supposed to be saving for retirement, we need to consider our anticipated lifestyle choices, too. If you expect to travel extensively, enjoy lots of nightlife, and dine out frequently, then you'll need more money than someone who's willing to spend his or her weeks taking day trips, visiting low-cost museums, and cooking at home.

Your desire to work (or not) in some capacity during retirement should also come into play. If you think you'll start your own business in retirement, consult in your former field, or get some other type of gig that generates income, then there won't be quite as much pressure on your savings. But again, that's a lifestyle choice.

Saving the right amount for you

There's certainly nothing wrong with saving 20% of your earnings for the future. That's a respectable percentage of income to sock away, and if you end up with extra money in retirement, that's certainly not the worst problem to have. But before you get too set on that 20%, think about what you spend today, what you want out of retirement, and how those two figures might align.

If you currently spend only about $4,000 a month despite earning $100,000 a year, and you choose to save $10,000 a year for retirement over a 30-year period, you'll wind up with about $944,000, assuming your investments give you an average annual 7% return. If you then withdraw from that $944,000 at a rate of 4% per year, which has long been the convention, you'll get close to $38,000 a year in income from savings alone. Add in another $20,000 from Social Security (and that's a conservative estimate for someone earning $100,000, but since the program's future is somewhat shaky, let's err on the side of pessimism) and you'll be looking at $58,000. Subtract taxes, and chances are you'll wind up with roughly the same $4,000 a month you're used to spending.

Now, you may be thinking: Why would someone earning $100,000 but spending $48,000 not manage to save 20% of that income for retirement? Maybe you're using that money to build a sizable college fund for your children and future grandchildren. Maybe you're aiming to invest in a second home that your family can use for vacations or that can generate rental income at some point in time. There are different reasons why someone wouldn't put all of their spare money into an IRA or 401(k).

The point, therefore, is to focus more on your personal income habits and needs than on general conventions. Those "save this and that" guidelines are good advice for people who need a starting point to work with, but once you get a handle on your finances, you can land on a savings target that helps you meet your goals.

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