Not only is saving for retirement a stressful part of planning for one’s future, but ensuring that enough is saved raises a completely separate set of questions.
The amount you will need to save depends on a few factors:
- Life expectancy: Though morbid, you will want to ensure that you can sustain yourself in retirement for the next few decades. Depending on your support system, this amount may vary.
- Renting or owning: Housing is a major cost for seniors who do not own their homes and must continue to pay rent or make mortgage payments, which can reduce their retirement checks. You will want to take these costs into consideration.
- Inflation: You have to assume that prices will continue to increase during your retirement, and you should know that the Cost-of-Living Adjustment (COLA) made by the Social Security Administration (SSA) each year does not always fill the gaps in purchasing power left by inflation. Additionally, funds withdrawn from a private retirement account like a 401(k) are not subjected to a COLA, so you may want to factor in a 2 percent increase in the amount you will withdraw each year that you retire. Two percent is the inflation target that the Federal Reserve aims to keep price increases under.
How to calculate your annual savings target
Assuming you plan to save for twenty years of retirement income at $60,000 a year, you will need to save at least $1.2 million. How much you will need to save each year depends on where you are in your career.
If you are about 20 years out from retirement and have yet to begin saving, reaching this target will be much more difficult than for younger workers who are just entering the workforce.
For those looking to save using a private retirement account, your earnings will depend on the stock market. According to Smart Asset, the average returns on a 401(k) tend to vary between 5 and 8 percent a year, though these returns cannot be assured. These returns compound over time. What does this mean?
Assume that over three years, you add $5,000 to your retirement account and that the value of the portfolio increases by 5 percent each year.
Year 1:
- Assuming your savings sits at $0.
- Add your annual savings goal, lets say ours is $5,000.
- Apply 5% growth in the value of your portfolio: $5,000 * 1.05 = $5,250.
Year 2:
- You will start with $5,250.
- Add $5,000: $5,250 + $5,000 = $10,250.
- Apply 5% growth in the value of your portfolio: $10,250 * 1.05 = $10,762.50.
Year 3:
- Start with $10,762.50.
- Add $5,000: $10,762.50 + $5,000 = $15,762.50.
- Apply 5% growth in the value of your portfolio: $15,762.50 * 1.05 = $16,550.63.
Based on the savings rate of $5,000 a year, it would take 52 years to save the $1.2 million necessary to reach your goal. But what if you don’t have more than a half-century to save? How much would you need to save each year?
- 10 years: $90,864 per year
- 15 years: $52,964 per year
- 20 years: $34,564 per year
- 25 years: $23,947 per year
- 30 years: $17,203 per year
- 35 years: $12,655 per year
- 40 years: $9,462 per year.
Does your employer match your contributions?
When searching for a job, you should ask if your prospective employer matches or contributes to private retirement accounts as a benefit of working for the organization. In 2024, according to the Bureau of Labor Statistics, two-thirds of workers in the US were employed at an organization that provided them access to a private retirement account, but not all were able to participate. Participation is not always made easy if the salary offered is so low that putting aside money for retirement is not possible, given the monthly budget the worker has to work with.