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Everyone needs money for retirement – but how much do you need to make your golden years feel golden? It’s a balancing act. On the one hand, you need money to ensure that you have a comfortable retirement and don’t outlive your money. On the other hand, you don’t want to sacrifice so much in your working years that you don’t enjoy life.

According to a Bankrate survey, more than half of Americans feel their retirement savings are behind where they need to be. No matter your age, now is the time to start thinking about saving more cash for when you’re older.

Answering how much you should save for retirement has no simple answer. Instead, thinking about how to prepare for retirement relies on answering a number of other questions, too.

  • How much do you plan to spend each year during retirement? The more you spend, the more money you’ll need.
  • How long will you need your retirement account to last? The longer you need your money, the more you’re going to need.
  • How long do you have until retirement? The longer, the better, because you have more time to amass money.
  • What kind of investment returns can you expect? The higher your returns, the less money you’ll need to save or invest in the interim.

That list of questions could have many different answers, depending on your situation. Plus, a lot can change between now and retirement. Markets go up and down, for example, so it can be difficult to get a real gauge on any of these variables. We’ll need to make reasonable assumptions about what you might expect and then you can make adjustments as life changes.

Almost regardless of your life situation, you’ll have to save money to have a comfortable retirement. Here’s how to start saving and what steps you can take at each decade of your life.

Here’s how to run the numbers on your own retirement savings and what you need to save.

Start saving early for retirement

When it comes to saving for retirement, getting started early has big advantages. Money saved in your 20s or earlier has decades to grow and compound before you’ll rely on it during retirement, so savings made early in your career can really add up over time.

For example, if you start saving $75 per month at age 25, you’ll have more retirement savings at age 65 than if you save $100 per month starting at age 35. Just that 10-year difference has a major impact on the amount you’ll have saved, so starting early is key, even if you can only save small amounts.

Retirement’s 4 percent rule

One of the traditional rules of thumb about how much you should save for retirement is called the 4 percent rule. The idea here is that you should draw down no more than 4 percent of your retirement accounts in a given year, so that you can make your assets last over your retirement. This rule is one of several key withdrawal strategies to extend your retirement savings.

The rule has received some criticism for being less conservative than some advisors think it ought to be, but it’s still a well-tested guideline that provides you a ballpark estimate of what you can safely harvest from your funds. You can use this rule to work backward to reveal the amount you need to save for retirement: You multiply the money you need each year by 25 to figure out the total amount you need.

For example, if you want $10,000 in retirement money annually, then you’ll want about $250,000 in funds. But here’s the catch: you don’t have to have all the money right when you retire — if you can generate returns on your investments. So, thinking about how much you need to retire isn’t simply about generating enough money by a certain date. You should focus on finding a way to keep that money growing after you’ve stopped working.

Why you need returns

For example, if you had $100,000 cash sitting in an IRA and earning almost nothing, you could take out $4,000 in year one ($100,000 * 4 percent), $3,840 in year two ($96,000 * 4 percent) and so on. If you’re not earning much on your assets, your withdrawal declines over time. You eat into your principal quickly and take it down every year, hurting how much you can withdraw in future years.

Now, if you were earning 4 percent on your money, you can rest a bit easier since your account balance won’t be heading to zero so quickly. You could take out $4,000 in year one, then earn 4 percent on your investments. At the start of year two, you have a 4 percent return on your remaining principal for a total principal of $99,840, or $96,000 plus $3,840. So in year two, you can withdraw another 4 percent, or $3,993.60.

By investing in a 4 percent return, you’ve drastically pared how much principal you’ll have to take in any given year. Your 4 percent return is almost fully replacing the 4 percent you’re withdrawing each year and you still leave the principal mostly intact.

Now imagine you could earn a 6 percent return on your assets, while withdrawing only 4 percent. With the same $100,000 principal, you’d take out $4,000 in year one as usual. Then you’d have $96,000 and earn 6 percent, giving you $101,760. In year two, you could withdraw $4,070 and then $4,142 in year three and so on. You can actually grow your payout over time.

Once you earn a return higher than your withdrawal rate, you may actually grow your retirement account. The key ratio to keep an eye on is your investment return relative to your withdrawal rate. The secret is either to reduce your withdrawal rate or increase your investment return.

Tax-advantaged retirement accounts such as a traditional IRA or Roth IRA can amass money at an increased rate by helping you avoid taxes. Employer-based retirement accounts such as a traditional 401(k) or Roth 401(k) can also protect your investments from taxes.

How to get a 4 percent or better return

If you’re looking to clear that withdrawal hurdle of 4 percent, one way to do so is by owning the Standard & Poor’s 500 index, a broadly diversified collection of hundreds of America’s best companies. According to Goldman Sachs, the index averaged an annual return of 13.6 percent between 2010 and 2020 – far outpacing that 4 percent magic rule. However, it’s important to point out that the banking giant had a much lower forecast for the S&P in the future: a 6 percent return over the 2020s. While that number is lower, it’s still well above what you’d need for the standard withdrawal strategy. And it’s important to look at an even broader historical picture, which shows that the index has increased in value about 10 percent annually over long stretches of time.

Here’s what a $100,000 portfolio might look like over 10 years, assuming an average annual increase. The S&P 500 pays around a 2 percent dividend yield over time, so let’s start there.

Principal Withdrawal Annual dividends Capital gain Ending balance
$100,000 $4,000 $1,920 $9,792 $107,712
$107,712 $4,308 $2,068 $10,547 $116,019
$116,019 $4,641 $2,228 $11,361 $124,966
$124,966 $4,999 $2,399 $12,237 $134,604
$134,604 $5,384 $2,584 $13,180 $144,984
$144,984 $5,799 $2,784 $14,197 $156,165
$156,165 $6,247 $2,998 $15,292 $168,209
$168,209 $6,728 $3,230 $16,471 $181,181
$181,181 $7,247 $3,479 $17,741 $195,154
$195,154 $7,806 $3,747 $19,109 $210,204

This chart shows the starting balance of $100,000, your withdrawal amount, the dividends you earn on the post-withdrawal balance, and the ending balance, which factors in the withdrawal and the dividends and then adds in the market’s 10 percent growth rate.

Look at the withdrawal column to see the money you could take out at a 4 percent withdrawal rate. That amount continues to go up annually even as you withdraw money. Importantly, you’re actually increasing your account’s total balance. If you can make that happen, thinking about how much you should save for retirement becomes much less daunting.

How to mitigate your risk

It’s key to recognize that the market does not go up in a straight line. Some years it’s up 20 percent, while other years it’s down 15 percent or more. With the potential for volatility, you will not want to keep all your investments in stocks – particularly as you get closer to retirement. Many financial advisors will recommend an aggressive approach when you’re younger and adjust that level of risk as your final day at work approaches. Accept the risk when you can, and be conservative when you can’t.

For example, if you held 50 percent of your portfolio in stocks and 50 percent in bonds, you could earn the market’s 10 percent average annual return for half your portfolio and a bond return of perhaps 3 percent. Average those together, and you could still get a 6.5 percent return each year — still above a conservative withdrawal rate of 4 percent.

If you want to add lower-risk bonds to your portfolio, you can continue to do that and reduce your risk further but it also lowers your overall return. It’s important to note that such a strategy will also probably lower your future payouts, too, because it hurts growth in your investments.

Let’s run some real-life numbers

How much money will you actually need to retire? This depends heavily on your individual circumstances, such as whether you will still have a mortgage and what your healthcare costs will be.

Let’s base this rundown on $74,580 – the median family income in 2022, according to the U.S. Census Bureau. The common guideline is replacing 80 percent of your income in retirement, which means you’ll need $59,664 each year. If you’ve paid off your mortgage, you may need less.

Each year, you’ll also receive Social Security. The average monthly benefit for retired workers in April 2024 was about $1,915. That provides $45,960 in annual income for a married couple.

Then you’ll also want to subtract any other pension benefits that you receive. Some workers have pensions, 403(b) or 457(b) plans that can make the burden lighter.

In our hypothetical example, you’re left with a deficit of $13,704 to make up. Using the 4 percent rule and multiplying your goal by 25, you’ll need retirement accounts totaling $342,600. That’s how much you would need if you intended to retire today.

As prices continue to rise, however, you’ll need more money in the future to retire comfortably. That’s why you need at least some of your portfolio in higher-return vehicles such as stocks. And by now, you’ve probably heard plenty of rumbling about high inflation as demand outstrips supply for certain goods. So, be sure to educate yourself on how savers can stay ahead of inflation.

Of course, these real-life numbers do not take into consideration your real-life concerns. As you look ahead to making sure your golden years shine, consider some of these questions:

  • How much will you take from your retirement accounts? The lower the percentage, the longer your money can grow, and so the more you can take in the future.
  • Will your lifestyle change in retirement (go up or down)? If you trim your retirement budget, your money will last longer.
  • How much are you likely to receive in Social Security benefits? The more you receive in benefits, the less you’ll need to save in retirement accounts. This Social Security calculator will help you figure what you could receive.
  • If you’re married, will your spouse continue to work when you’re retired? A working spouse means you can retain a higher standard of living longer and let your investments grow more.
  • Are you a man or woman and funding your retirement alone? Women are paid less than men on average and that difference also affects retirement benefits such as Social Security.
  • How much willhealthcare cost? Costs have been rising at a fast clip for years.
  • Can you expect an inheritance that might make a difference? It’s not wise to expect any extra money along the way: You may not get any, and any money you do receive is not likely to be life-changing.
  • Are you willing or able tomove to a lower-cost state? Lower costs, such as taxes, mean your money goes further and you have to save less today.
  • Where will tax rates be in the future? No one has any idea of the answer.

What is the best way to save for retirement?

Saving for retirement isn’t easy, but there are a few vehicles that can help make it easier.

  • Employer-sponsored retirement plan. These plans, such as 401(k)s or 403(b)s, are a great tool for retirement saving and often become the first step in the process. Your contributions and earnings will grow tax-free, making it a little easier to reach your goals. Many employers also offer to match a portion of the contributions you make, which many experts compare to “free” money.
  • An individual retirement account, or IRA, is another great tool for saving.Contributing to an IRA may help you reduce your current tax bill while giving your contributions and earnings a chance to grow tax-free until retirement. Withdrawals made during retirement will be taxed, however.
  • Roth IRA. The Roth IRA provides many of the same benefits as a traditional IRA. However, since contributions are made with after-tax dollars, you won’t receive a current tax benefit. But the key differentiator with a Roth is that withdrawals made during retirement are completely tax-free, making it one of the most popular vehicles for retirement savers.

What is a realistic retirement income?

As mentioned above, the amount of money you’ll need to retire depends on your individual circumstances. What works for some people might not be enough for others.

During retirement, your earnings will likely come from a combination of Social Security payments and withdrawals made from employer-sponsored retirement plans and IRA accounts. The more you’re able to contribute to those accounts during your working years, the more you’ll have to rely on during retirement. The amount you’ll need will vary, but experts generally recommend being able to replace about 80 percent of your salary during retirement.

Use a retirement calculator

As you can see, how much money you need for retirement can be tough to assess. Use Bankrate’s retirement calculator to include your individual circumstances so that you can better understand how your savings looks now and what you can do to improve your chances of a comfortable retirement. Be smart about your savings strategy so that when you stop working, you can really start living.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.