Retirement savings rules of thumb

Put 15 percent of your annual income toward retirement

Many experts recommend saving at least 10 percent to 15 percent of your income annually for retirement. This is a good goal to strive for, though for some people, it may not be enough. 

For instance, if you still have a hefty mortgage payment when you reach retirement age, your expenses will be higher than those of your peers who paid off their house in their forties or fifties. If you plan to give financial support or expensive gifts to children or grandchildren during retirement, you’ll also have higher expenses than those who simply plan to support themselves. 

Also, if you didn’t start disciplined saving for retirement until later in life, you will probably need to save a higher percentage of your income in the remaining years than those who started saving in their early twenties.  

Save enough to cover 80 percent of your pre-retirement income

Another common rule of thumb for retirement savings is to aim to save enough to cover about 80 percent of your pre-retirement annual income.

That means if you earn $100,000, you should aim to save $80,000 for each year of your retirement. If you plan to retire at age 70 and are planning for 20 years of retirement, you’ll need to save $1.6 million ($80,000 x 20) by then. Social Security can be included in this total though, too. So, let’s say you expect to be paid $14,000 each year during retirement. That will total $288,000 over 20 years. So the total you’d need to reach through saving and investing is reduced to $1.31 million.

These rules of thumb can offer general guidance, but it’s helpful to consider your personal circumstances and goals. You can use an online retirement savings calculator to determine how much you should aim to set aside annually to reach the retirement savings target you want. 

Other factors to consider when saving for retirement

Life expectancy

The average American’s life expectancy is about 79 years, according to the CDC’s National Center for Health Statistics. So if you want to retire at 65, you should plan for your money to last at least 15 years—and potentially much longer, depending on your lifestyle, health and family history. 

Annual living expenses

In addition to figuring out how many years of retirement to plan for, you will also need to estimate your annual living expenses. That includes taxes, housing, food and health care. Households run by individuals 65 years and older spend an average of $48,885 per year, according to the Bureau of Labor Statistics. That number will vary depending on where you live, any debts you will carry into retirement, and other financial responsibilities. (For instance, have you promised to pay for a grandchild's college tuition?) 

Extra retirement costs 

Also, consider any extra costs you’ll want to budget for. That might include travel, gifts, hobbies and entertainment. Add those expenses to your annual total, and plug that number into an online retirement calculator that can show you how much to save monthly so that you can build the nest egg you need. 

Social Security

If you delay taking Social Security payments until you reach age 70, your monthly payments will be higher than if you started taking them earlier. Your exact payment will vary year to year based on cost-of-living adjustments and the average amount you earned during the 35 years you made the most money.  (As a reference point, the average estimated benefit in 2020 is $1,503 a month per beneficiary. But the Social Security Administration offers benefits estimators to help you figure out how much you might get.)

What if the retirement savings goal seems too big to reach?

You can always adjust your goal, and many people do. For instance, instead of retiring at 65, you could work a few more years to save more.  

In addition, look at your spending plans for retirement. Maybe you were planning to travel extensively. Consider reining in your plans slightly, such as focusing on the three trips most important to you. Include those in your retirement budget but give up some of the others. That may allow you to reach your retirement savings goal sooner so you can actually enjoy the travel that means the most to you.

Also, be sure to add Social Security or any other post-retirement income sources to your savings total. 

Finally, consider adjusting your current budget to free up more money to sock away for retirement. If you can spend less now, you may have more available for a financially secure retirement later.

How to start saving for retirement  

Start small and make incremental increases

Setting aside a huge chunk of your paycheck isn’t easy. Start by saving $25 or $50 per week, or whatever amount you can handle. Gradually work toward socking away 10 percent to 15 percent of your income each year. Once you’ve developed that habit, you can work toward increasing that amount if you need to.

Contribute enough to get a 401(k) match

If your employer offers a matching contribution for retirement savings, try to save enough to get the full match. For instance, if your employer will match your contributions up to 5 percent of your salary, but you only contribute 3 percent of your salary, you’re leaving free money on the table. 

Open an IRA or HSA

In addition to consistently contributing money to your retirement account at work, look for other ways to fund your retirement. For instance, you might open one or more IRAs to save on your own, outside of your 401(k) at work. If you have a health insurance plan that includes an option for a health savings account (HSA), your HSA contributions provide you with a tax benefit now—and if you leave them alone until you reach age 65, you can use the funds for any purpose (not just healthcare) with no tax liability. You might also consider investing in a rental property and adding all the rental income to your retirement portfolio. 

Building your retirement savings is both an art and a science: Do the calculations to arrive at the right number to set your personal goal, and then draw on your creativity to assemble an array of saving vehicles to help you meet that goal.

Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.