What Percentage of Your Salary Should Go Toward Retirement?

How much money you need to be financially comfortable during retirement varies widely depending on the individual, and while it can be difficult to forecast exactly what you’ll need during retirement, there are benchmarks to aim for. 

The ideal savings rate varies by expert or study because making plans for the future depends on many unknown variables, such as not knowing how long you’ll be working, how well your investments will do, or how long you will live, among other factors. Any calculation for retirement is usually an educated guess. However, it is possible to follow some key rules, starting with the assumption you will have a steady income stream until age 65.

How Much Should You Save?

Academic retirement saving studies use the term replacement rate. This is the percentage of your salary that you’ll receive as income during retirement from your retirement accounts. For example, if you made $100,000 a year when you were employed but receive $38,000 a year in retirement payments, your replacement rate is 38%. The variables included in a replacement rate include savings, taxes, and spending needs, and this rate may go up and down during the course of your retirement depending on a variety of factors such as market fluctuations, and your tax bracket, which could be subject to change.

Replacement Rate

When you plan for retirement, your pre-retirement income typically sets the basis for your estimated spending during your retirement. For example, if you earn $100,000 a year, you would need to replace a percentage of your annual salary. Depending on your expenses, you could use a 75% replacement rate, a typical rate used by financial planners, to spend when you stop working. Your preretirement income replacement rate is based on your estimated spending in retirement.

Of course, 75% of your annual salary may be too high if you haven't saved enough for retirement, and how much you use in retirement depends on the type of retirement saving vehicle used, like a Roth versus a traditional IRA, or a 401(k).

Estimating Your Replacement Rate

So, if your annual salary is $100,000, and you use the 75% replacement rate as a starting point, you will need to earn $75,000 from various retirement resources such as 401k accounts, part-time work, and social security. To be extra careful when planning your retirement replacement rate, you may want to leave out social security to be able to estimate a savings level to use when planning your retirement.

The good news? Most people, especially couples, need less income, not more, during retirement for various reasons, including lower taxes and simply spending less money. In addition, it may be better to estimate more money than less money for retirement. You can always continue to invest in certain types of accounts, and if your money remains in the market, it will grow if you take the required minimum distributions.

The Family Factor

These studies calculate savings for individuals, but what about families? Parents with young children may choose to save for their college—one rule is at least $2,000 times your child's age each year to see if you are on track to help cover the cost of university.

Costs associated with children can make saving for retirement even more daunting, but if you have a college account for your kids, you are less likely to dip into your retirement to pay for school. In addition, needed retirement savings for a couple may not be twice as much as an individual because couples usually share many significant expenses—a home, for example.

If you are married, you will need to consider what kind of lifestyle you want to have when you retire as a couple. Also, you can consider if one or both spouses will retire simultaneously. Some experts recommend saving 10 times your annual income by age 67, but not all couples will have that much in retirement.

The Matching Contribution Bonus

For people who start saving early and take advantage of employer-sponsored plans, such as 401(k)s, hitting savings goals isn’t as daunting as it may sound. Employer matching contributions could significantly reduce what you need to save per month. These contributions are made pre-tax and it's the equivalent of "free money."

Say you save 3% of your income during a year and your company matches that 3% in your 401(k), "you will make a 100% return on the amount you saved that year," said Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass.

The Bottom Line

There is no one-size-fits-all answer to how much you for retirement, but academic studies based on historical data can give you a ballpark figure. Aim to save around 15% of your annual salary if you’re early in your career. This alone might seem like a tough task, but take advantage of employer matching and find new ways to reduce expenses. If you wait until later in life to start saving, you'll need to put away more of your salary, or risk running out of money during retirement.