How much you need to save for retirement varies from one individual to another. You must save basis your current income and the lifestyle you wish to lead upon retirement.
Investing versus saving
Schwab research shows that 64% of people consider themselves savers, not investors. Because of this, 54% of 401(k) account holders put additional retirement funds in a savings account, not an investment account like an IRA, health savings account (HSA), or brokerage account. The problem with this approach is that savings accounts pay very little to no returns. Actively managing your 401(k) account and other investment accounts like a brokerage account, IRA, or HSA is key to making them grow.
Saving for retirement by age
Knowing how much to save for retirement at different stages of your life can help you figure out how much you need to retire. Two formulas that can help you set savings goals based on your age are:
1) Percentage of your salary
Fidelity recommends that by the age of 30, you should’ve saved an amount equal to your annual salary in accumulated savings—invest at least 50% in stocks and start saving 15% of your gross salary from age 25. As per Fidelity, you should’ve saved double your annual salary by age 40, quadruple your annual salary by age 50, six times your annual salary by age 60, and eight times your annual salary by age 67.
2) A more aggressive formula
You could also follow another formula—starting in your 20s, save 25% of your gross annual salary each year. While this may seem like a difficult task, remember that it includes 401(k) withholdings, matching contributions from your employer, and other types of savings.
By following this formula, you will accumulate your full annual salary by the time you’re 30. Continuing to follow this formula should help you save:
- double your annual salary by age 35
- quadruple your annual salary by age 45
- six times your annual salary by age 55
- eight times your annual salary by age 65
Saving funds can help ensure a smooth retired life.