Financial Rules Of Thumb: Retirement Savings

November 11, 2015

Continuing my financial rules of thumb series, this week let’s talk about a question that pretty much every person has asked me on our Financial Helpline: How much should I be saving for retirement and how much do I need total? While the answer varies depending on each person’s circumstances, goals and ultimately their values, there are some rules of thumb for those who either don’t feel like running a retirement estimator calculation or who just aren’t quite sure yet what their goals are.

How much should you be saving? This is a question often asked by younger people, to whom the thought of retirement is just a distant concept, much like college was when you went to kindergarten. Assuming you start saving early, putting 10-12% of your income toward retirement throughout your career should be more than enough to allow you to retire comfortably in your 60’s. The good news is, this amount includes any employer match. For example, I receive a 3% annual contribution to my 401(k), courtesy of Financial Finesse, so I really only need to come up with 7–9% to obey this rule.

Getting a late start? You’re not out of luck. You’ll just have to save more or adjust your expectations for your post-working lifestyle.

Most of the people I talk to these days who are nearing retirement age aren’t actually ready to be DONE – done with work anyway. They just need a change of pace, more flexibility, different duties, etc. Having some money in savings will at least give you the freedom to switch it up a little in those later years.

Many of the nurses I talk with really just want to dial back their hours and spend less time on their feet, but they’ll still work some. My mom actually subs occasionally at the school where she used to work, which helps to pay for travel that isn’t a part of my parents’ fixed income budget. Others plan to consult or even work a fun retail job.

However, I’m a huge fan of starting early. Not only does it help to establish the habit before you’re burdened with additional costs like owning a home and raising kids, but you’ll have compound interest on your side. I saw a recent blurb in a financial magazine that demonstrated how it would take a saver 31 years to reach her first $1 million if she saved 10% per year, but the second million would only take 10 years to accumulate. That’s the power of compound interest. It’s more powerful than you think!

So what’s the rule of thumb for that magic amount you want to have saved? This is a common question asked by people in their 50’s. They’re starting to see the light at the end of the tunnel and wondering how bright it really is.

The general rule is that if you wish to retire in your early 60’s, you’ll need to have saved about 16 times the annual amount you’ll need to live on. In other words, if you think you’ll need $100,000 per year to live on during retirement, then you’ll need $1.6 million saved in order to retire and not run out of money. If you are lucky enough to have a pension or other types of ongoing income besides Social Security in retirement, that amount can obviously be less. But the real determinant of how much you’ll need is how much you plan to spend.

If your post-working budget is still a little fuzzy, then just base it on your current income to give you a good idea of that target balance. Ultimately, using a retirement estimator calculator and updating it annually is the best way to track your progress. Next week, we’ll cover the rules of thumb around insurance. Make sure you sign up to receive our blog posts in your inbox so you don’t miss it!