How Much Should You Save for Retirement?

You may build your retirement savings through an employer-sponsored retirement account. However, if you don’t have one of these accounts, are independently employed, or for some reason didn’t participate in your employer’s plan — it’s not too late. There are a variety of ways to save, but you do need to start sooner than later. Experts generally recommend saving at least 15% of your income and stress the value of compounding earnings.?

By Helen Harris ?

You may have a savings account, separate from your checking account, that you put extra money into. But do you have a retirement plan that is actively growing your money — and if so, do you know how much to contribute and what your options are for saving and investing toward a comfortable retirement??

Methods To Start Saving and Investing for Your Retirement

Defined Benefit Plans: Pensions

If you work full-time, your employer might offer either a defined benefit plan (pension) or a defined contribution plan.

As defined by the U.S. Department of Labor, a defined benefit plan promises a specified monthly benefit at retirement and may state this promised benefit as an exact dollar amount (such as $100 per month) at retirement.?

More commonly, however, is having your benefits calculated through a plan formula that considers factors such as salary and service. Benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

But ultimately, pensions aren’t very common retirement vehicles anymore. The percentage of workers in the private sector whose only retirement account is a defined benefit pension plan (typically industries with a strong union presence, such as the airline and auto sectors) is now 4%, down from 60% in the early 1980s. And about 14% of companies offer a combination of both types.

Defined Contribution Plans: 401(k)s and IRAs

With fewer employers offering pensions, most of the workforce is more familiar with defined contribution plans, such as 401(k) plans , 403(b) plans, employee stock ownership plans, and profit-sharing plans.

With these types of plans, you are not promised a specific amount of benefits at retirement but rather you and/or your employer contribute to your individual account under the plan. You ultimately receive the balance in your account, which is based on the vested amount and contributions — plus or minus investment gains or losses.?

But what if you are an independent contractor or if your employer doesn’t offer a defined contribution plan??

You can open a Roth IRA . The Motley Fool reports that you might want to consider this even if your employer offers a 401(k) because of the minimal fees and greater investment and withdrawal flexibility. Having both plans can also help diversify the tax treatment of your withdrawals in retirement since 401(k) withdrawals incur taxes but Roth IRA withdrawals don't.?

If you have a defined contribution plan and/or a Roth IRA and are making regular contributions, this is a great step. You’re saving and investing for retirement.?

Once you are familiar and comfortable with regularly investing and putting money into your employee-sponsored account, you may even consider diversifying your retirement portfolio. A few ways this can be done include real estate (commercial and residential), annuities, stocks and bonds, and cryptocurrencies.?

What Percentage of Your Income To Put Toward Retirement

Most people aim to save 15% of their income toward retirement. Fidelity writes that you should bear in mind that your target saving rate may vary depending on a variety of factors, including when you plan to retire, your retirement lifestyle, when you started saving and how much you've already saved.

But why 15%??

Fidelity analyzed national spending data to determine how much people generally spend on retirement. It concluded that most people will need somewhere between 55% and 80% of their pre-retirement income to maintain their lifestyle in retirement.

This may have you wondering, especially now in times of high inflation and economic uncertainty, if 15% will be enough.?

That’s a personal decision that hinges on the spending choices you make before retirement. But of course, it never hurts to put more aside — especially if you are late to the game with starting your retirement plan.?

“By age 30, Fidelity says that you should have one times your gross income saved for retirement to be on track,” said Natalie Taylor, CFP, BFA, a values-based financial advisor, recommends in her LinkedIn Learning video .

Taylor gives the example that if your salary and bonus add up to 75,000 a year, you'd be on track at age 30 if you had at least $75,000 in your IRAs and employer-sponsored retirement plans. And you should aim to continue saving 15% to stay on track.?

However, she states that if you have less than $75,000 in your retirement accounts, you'll want to aim higher than 15% as your target savings rate. On the flip side, if you have more than $75,000, you could potentially save a bit less than 15%.

“But if you can afford it, I wouldn't decrease your contributions; save while you can,” said Taylor. “According to Fidelity, you should aim to have three times your gross income saved in retirement accounts by age 40; by 50, you should aim for six times your gross income; by 60, aim for eight times your gross income; by 67, aim to have ten times your gross income saved for retirement.”?

For example, if you're 67 and you currently make 200,000 a year, you would want to aim to have 10 times that amount — or 2 million saved — to be ready to retire.?

What To Do If You’re Behind?

But if you find that you’re off track with your savings, you are certainly not alone.?

In fact, a recent Bankrate survey found that around 55% of Americans say they’re behind on saving for retirement.?

And CNBC reports that this statistic makes sense and that a comfortable retirement can seem like a hopeless goal when you look at the commonly recommended savings guidelines.

Additionally, there are many understandable reasons why you may fall behind on saving for retirement. For instance, you may still be in school for a profession that will eventually pay well, or you may have recently started your career.

CNBC adds that while a rule of thumb for savings goals can be helpful, it’s not a one-size-fits-all plan for every type of saver — especially those just getting started.

What is more important is creating a habit of saving some amount at all stages of your career, no matter how small, and increase when you can.?

“Someone who’s not on track with savings can catch up later on,” said Beata Dragovics , a certified financial planner, in CNBC.?

Dragovics also states she has had clients who didn’t start seriously saving until their 40s who are now on track to comfortably retire.

You shouldn’t forget, however, that the closer you are to retirement, the less time your investments will have to grow. This is why it’s important to save any amount you can at all stages of your career.?

“Every little bit helps, especially if you have years of compound interest working for you,” said Jeremy Finger, a certified financial planner, to CNBC. “If you can’t save 20%, save 10%. Can’t save 10%? Save 5%.”

Taylor suggests that if you use an employer-sponsored retirement plan, you may want to consider checking whether they offer an auto-increase option. This way, you can enable your savings percentage to bump up automatically over time without having to do anything. She says you can also make progress if you use bonuses to put extra funds toward retirement.?

“Whether it's increasing your 401k percentage for the pay period when you receive your bonus, or maybe using some of your bonus to save into a Roth IRA, windfalls like bonuses, commissions and equity compensation can be a great way to make progress. … [F]igure out what you can do to take a step in the right direction. Try increasing your contribution by 1% every six to 12 months and every time you get a raise. Take it one step at a time.”?

Why You Should Start Saving Early for Retirement??

While it can be difficult to start a new habit or take out a percentage of your once-disposable income to dedicate toward retirement, you must take this important step now so your money can grow to the maximum potential.?

“Saving for retirement refers to the amount that you're putting into your retirement accounts, and then those dollars that you save are invested for retirement so that they can grow over time and help you reach your goal,” says Taylor.?

Capital Group stresses that the more you invest and the earlier you start means your retirement savings will have that much more time and potential to grow.

“By investing early and staying invested, you may be able to take advantage of compound earnings,” writes Capital Group. “‘Make money on your money’ is the concept behind compounding. Compounding is when the money you earn from your investments is reinvested for the opportunity to earn even more.”?

To demonstrate the effect of compounding earnings and the impact of saving early vs. starting later, Capital Group provides the following example:?

• You have a current salary of $30,000, receive 4% annual raises, and plan to retire in 30 years.
• You put 4% of your salary into a retirement plan each year and earn an 8% annual return.
• If you start saving immediately, you’d have $220,944 when you retire.
• If you delay five years before investing, you’d have $164,878 (assuming the same retirement date, salary, raises, savings rate and return).
• Waiting five years, in this case, would cost you $56,066.

You can see from above that the impact of delaying retirement savings is tremendous, and even starting small is better than no start at all. Even the smallest intentional habit now can lead to long-term retirement success.?

“Keep in mind that it's easier to find dollars for goals like retirement in some seasons, and harder in others,” said Taylor. “So figure out what you can do when you can do it. Do your best and stick with it.”

Top Takeaways?

How Much Should You Save for Retirement?

• “Saving for retirement refers to the amount that you're putting into your retirement accounts, and then those dollars that you save are invested for retirement so that they can grow over time and help you reach your goal.”
• Data shows that most people should be saving at least 15% of their income to retire comfortably.
• “By age 30, Fidelity says that you should have one times your gross income saved for retirement to be on track,”
• The more you invest and the earlier you start means your retirement savings will have that much more time and potential to grow.
• You can still catch up if you’re behind: You can start regularly contributing at a comfortable amount and increasing your retirement account contribution as you hit milestones, such as a pay raise or getting a bonus.?