How much should I save for retirement?


Different profit, Smarter profit. Our authors’ works have appeared in the magazines of the whole world.


  • The earlier you start saving for retirement, the better.
  • If you save small amounts early, you can make gains over time.
    Accounts like 401(k)s and IRAs offer tax advantages that can help you save more.
  • Take advantage of a 401(k) program if your employer offers one.
  • There is no formula that accurately predicts how much money you will need, but many tools can provide helpful estimates.

Retirement seems a long way off, especially if you’re in your 20s or 30s. But while it’s tempting to put off saving, this is one area where you shouldn’t procrastinate. According to AARP, nearly half of American retirees say a lack of money is their biggest concern.

When you start saving early, you’ve more time to save, and your investments have more time to potentially grow. Thanks to the power of compound interest, this means you may not need to save as aggressively in retirement. (After all, it’s no fun to play catch-up).

Saving for retirement is like preparing for a road trip…

When you go on a trip, it’s often hard to anticipate all the costs. Maybe the motor home’s engine overheats, or the plumbing breaks. Along the way, you may have to stop at a mechanic’s. Even if you have a rough idea of where you want to go and how much your trip might cost, you can not perfectly prepare for everything.

It can be similar with retirement. In order to achieve the lifestyle you want, you need to make sure you have enough saved to pay for not only the necessities, but all the other activities and purchases that are important to you. No one wants to run out of money, either down the road or in retirement. So let us take a closer look at how you can prepare.

Choose your retirement vehicle

There are two main types of retirement accounts: 401(k)s and IRAs. Both offer a tax benefit that provides an incentive to save. It’s important to know that you cannot withdraw funds in these accounts before retirement age (generally 59½ years) without paying a 10 percent early withdrawal penalty, plus any income tax due.

401(k)s 401(k) plans are retirement accounts typically offered to employees by their employers. Basically, each time you receive a paycheck, you take a portion of the money and set it aside for later (we’ll get into the details in a moment). For people under 50, the Internal Revenue Service (IRS) allows you to contribute up to $19,500 each year to a 401(k) – that’s, starting in 2020. For people over 50, that limit increases to $26,000. (This can be especially helpful for people who haven’t saved much before).

There are different types of 401(k) plans, and each one works a little differently. We’ll talk about two of the most common types: Traditional 401(k)s and Roth 401(k)s. The main difference between them is when the taxes kick in.

In a traditional 401(k), you get a tax deduction today, so your taxes don’t accrue until later. When you contribute to a traditional 401(k), the money from your paycheck is transferred to your retirement account tax-free – meaning you get a tax deduction for your earnings this year. For example, if you earn $60,000 this year and contribute $5,000 to a traditional 401(k), you’ll only have to pay taxes on $55,000 in 2020. However, your taxes don’t just disappear. You may get a tax break up front, but when you withdraw money from your account in retirement, you’ll have to pay taxes on the withdrawal based on your future tax bracket.

If you expect to be in a lower tax bracket in retirement, a traditional 401(k) is a good way to minimize your overall tax burden. The idea is that your future tax rate could be lower than the rate you’d pay if you saved the money.

In a Roth 401(k), you pay taxes today, so you’ve a tax advantage later. If you contribute to a Roth 401(k), you won’t get a tax break today. Even though you’re saving for retirement, you’re paying taxes as if the money were going into your pocket right away. The upside, however, is that any earnings you earn on the account (dividends, interest and capital gains) are all yours, as they can grow tax-free (with limitations). Of course, you’ve to weigh whether this strategy makes sense for you – it means that you’ll have to pay more taxes sooner, and no one can say exactly how taxes will develop in 30 or 40 years.

The employer match

In addition to the tax benefits, one of the most important features of a 401(k) plan is the possibility of an employer-sponsored additional incentive (also called an “employer match”). It’s sort of like being sponsored by friends and family to participate in a marathon (e.g., $1 for every mile you run).

Here’s how it works: many companies offer a 401(k) match that’s, say, 3% of your annual salary when you contribute to your retirement account. If you make $60,000 a year and contribute 3%, that means you save $1,800 yourself and your company contributes another $1,800 for you. (Pretty awesome, right?)

However, that’s not always the case. How the employer contribution works – and whether it even exists – varies. Some companies offer as little as 50% of your contribution. So if you saved $1,800, you might receive $900. (Still not bad.) Note, however, that there may be other restrictions. For example, you must remain with the company for a certain number of years to receive the contributions (ask your plan administrator about your “vesting schedule”). There’s also the possibility that an employer may stop increasing its contribution. If your employer offers this benefit, be sure to contribute to your 401(k), at least enough to get the full match. If you don’t, you’re essentially leaving money on the table.

Typically, your employer selects the plan administrator for the account. However, if you leave your job, you can transfer the money to a retirement account of your choice or one from your new employer.


IRAs are individual retirement accounts that are completely independent of your employer. You can open one at IRA at many financial institutions. Like 401(k)s, IRAs come in several varieties. Some of the most common types are Roth IRAs and Traditional IRAs. (There are also SEP IRAs, SIMPLE IRAs, and a few more.) The main difference between Traditional and Roth IRAs IRA is when you pay taxes on the money in the account.

For 2020, the IRS total contribution limit for any type of IRA is $6,000 per year for individuals under age 50. For individuals age 50 and older, the contribution limit is $7,000. Typically, these limits are increased year over year to keep pace with inflation.

Traditional IRA

As with a traditional 401(k), the money can be deposited into a traditional IRA tax-free and provide a tax deduction. When the money is withdrawn in retirement, you pay taxes on all the money income. There is also a non-deductible version for those in higher income brackets with fewer tax benefits.

Roth IRA

Similarly, a Roth IRA is equivalent to a Roth 401(k). With a Roth IRA, contributions are taxed at the time they’re received in the account. However, if you withdraw your funds in retirement, they (and any earnings) are tax-free under most circumstances.

For those wondering, they’re called “Roth” IRAs and Roth 401(k)s because related legislation for these retirement accounts was introduced by Senator William Roth in 1997.

Other Taxes and Penalties

Retirement accounts can provide useful tax benefits, but you need to consider whether their provisions make sense for your situation. That’s because these accounts often have some important limitations. Here’s one of the most important: You can’t withdraw the funds before you reach retirement age (usually age 59½). If you do, you’ll have to pay a 10% early withdrawal penalty in addition to any applicable income taxes.

Save for the retirement lifestyle you want

Conventional wisdom suggests saving for at least 30 years of retirement, possibly longer. Life expectancy continues to increase with developments in the medical field, so you may need more. Despite these uncertainties, the first step in deciding how much to save is to consider how you want to live during those years.

Where do you want to live?

Just like planning a vacation, you should consider where you want to go. Do you want to sip lemonade on the beach in Florida (a state with no income tax) or do you see yourself living in a Manhattan high-rise and partying into your 80s?

But before you envision life as a breakdancing octogenarian, consider what else you need – and what you can afford. Do you want to stay close to family and friends? What kind of medical care might you need? Depending on your financial situation, you may want to stay in a home where you’ve paid off the mortgage. Whatever your lifestyle, your projected living expenses can help you set your savings goals.

What do you want to do?

If your wish list includes a trip around the world or building a house, you need to save more to make those plans a reality. Also, consider how you would like to help your family. Would you pay for your grandchildren’s college expenses? Would you like to give the kids a trip to Disney World? Would you like to donate to charity or leave a legacy?

When do you hope to stop working?

According to a 2018 Gallup poll, many people in the U.S. expect to retire at age 66. (Note: This figure is higher than it was in the 1990s, reflecting dwindling confidence in social safety nets such as pensions and Social Security and the rising cost of living.) When you want to retire depends on many factors, not the least of which is whether you simply want to keep working.

These life decisions are important because they affect how much you can or need to withdraw from your retirement account(s) each year. You should also plan for unexpected costs, such as medical care, which may increase as you age.

How much should I save?

It depends a lot on how much you can spend. According to the American Association of Retired Persons (AARP), retirees should expect to spend 70% to 80% of their annual income before retirement. If a person earned $100,000 before retirement, that means they can spend about $75,000 a year. However, that might not be enough. Some financial planners recommend setting aside 75 to 85 percent of annual income for retirement. Retirement calculators can help you get an idea of how much you can save over a period of time and at different possible rates of return.

Some financial planners recommend the “4 percent rule” as a guide for how much you can save in retirement. Under this estimate, you would take four percent of your savings out of your retirement fund each year.

Thinking this backward, you can try to project how much you will need in retirement. By multiplying your annual expenses by 25, you can calculate how much you might want to aim for. For example, a person spending $40,000 a year today would need $1 million to live a lifestyle in retirement that matches that of their career.

For some people, this estimate may be too low because the concept was developed assuming greater support from public systems such as Social Security and higher interest rates. (By 2021, Social Security costs are expected to exceed total program revenues, according to Social Security and Medicare trust funds.) Still, the principle holds to some degree. If you can earn more on your investments than you spend each year, that’s a good place to start. However you go about it, you should not rely on a calculator or formula to plan for your retirement. It’s ideal to start saving as early as possible, since you may only have 30 or 40 years and need $1 million (or more) for a comfortable retirement.

4 Steps to start saving for retirement

  1. If you aren’t yet saving for retirement, you should start as soon as possible. An early retirement savings plan reduces the burden of saving as you approach retirement age. At the very least, try to take full advantage of your employer’s matching contribution to a 401(k) retirement plan if your employer offers one – it’s free money.
  2. Work your way up to saving 12 to 15 percent or more of your income in retirement accounts. If you’re just starting out and can’t afford to save much, you can set a goal to increase your savings by 1percent each year.
  3. Pay down debt, especially high-interest debt, so you’ve more options to invest your savings instead of paying interest on accumulating debt.
  4. Take time to learn about investing your savings and understand the fees involved. As a general rule, the closer you get to retirement, the more you should shift your retirement investments from relatively riskier investments with higher returns (stocks) to more stable investments such as U.S. government bonds.

Should Social Security influence my savings?

Social Security is a government program that provides financial assistance to citizens over a certain age. For retirees in the United States, the Social Security Administration pays a monthly amount equal to a portion of one’s pre-retirement wages (once one has worked a certain number of years). However, on average, Social Security recipients receive only 40% of their pre-retirement income, so it is important not to rely on Social Security to fund retirement. The question is what the program will look like in the next 20 to 40 years and whether it will even exist, especially as the U.S. government deficit continues to grow. While it is good to know that the program exists now, it is better not to rely on it.

What is the FIRE movement? What is lean FIRE?

Some people want to retire much earlier than the traditional age. The FIRE movement advocates extreme saving and encourages people to set aside 70% or more of their income during their working years. They believe this will allow them to retire earlier and live off that savings. FIREThe acronym “” stands for “Financial Independence, Early Retirement.”

The movement FIRE, which dates back to the 1992 book Your Money or Your Life by Joe Dominguez and Vicki Robin, is of particular interest to people between the ages of 20 and 40. However, this plan can carry significant risks. First, savings are dependent on events in the world, including the ups and downs of the stock market and changes in interest rates. Unforeseen circumstances can wreck even the best-laid plans and affect your ability to live the life you want (or even stay retired) in retirement. The extreme frugality required to save 70% of your paycheck could also mean giving up many of life’s simple pleasures.

All in all, there’s no specific number or percentage that dictates how much you should save for retirement. Just like planning a road trip, how much you save for retirement is a personal decision that will be influenced by your lifestyle habits and a number of factors beyond your control, such as interest rates and the stock market. It’s best to start early or as soon as possible. To be successful, it’s helpful to think about what you want for the future, find ways to start saving, and build your plan from there.

Scroll to Top
Scroll to Top