What Percent of Your Salary Should You Save for Retirement? (by Starting Age)

Here's an easy-to-use graph that suggests the percent of your salary you should save for retirement depending upon the age you start saving. It's based upon the commonly used 4% withdrawal approach to retirement savings, and is independent of your salary. Waiting too late to start your retirement planning & saving, or saving too little, can make the difference between having a secure, comfortable retirement and spending your golden years in poverty.

What Percent of My Salary Should I Save for Retirement? Some Benchmarks by Starting Age

Annual Retirement Savings Percentage Needed

Note: This chart is for those who do not expect to receive Social Security. See also Percent to Save With Social Security, saving percents for higher income earners, and the final section of this post.

Start Saving & Investing When You Are Young, And Don't Invest Overly Conservatively

This graph (click to enlarge) proposes some benchmarks for those planning to retire without a pension or Social Security. While your specific circumstances may differ from what I have assumed (see "Key Assumptions" below), they won't change the basic messages that I think this chart sends, namely:

• The earlier you start planning & saving for retirement, the better off you are (i.e., the less you will need to save each year)
  
• The lower your return on investment, the more you will have to save each year
  
• If you will not have a pension or Social Security, you very likely need to save at least 10% of your salary each year, regardless of when you start, or how much money you make.
  
• If you wait until age 30-35 to start saving, you could easily need to save 20-40% of your salary each year in order to fund a comfortable retirement
  
• Waiting until age 35 can mean that you will need to save approaching twice as much per month as would have been required if you had started at age 25
  
• If you wait until age 40-45 you'll probably need to change some of the assumptions....

While you're probably not surprised that you're better off starting early and earning a high return, you may be surprised at how quickly the savings burden can become unmanageable if you do not.

The Impact of Starting Age on Annual Retirement Savings Needed, in Dollars

The chart suggests that, without a pension or Social Security, if you start your retirement savings at age 25 and earn the 8% nominal return typically assumed by many retirement planners, you'll need to save about 16% of your annual salary each year.

This means that if you earn $50,000 a year, you will need to save about $667/month or $8,000 your first year -- $16,000 if you're earning $100,000. Wait 10 years, and the yearly numbers jump to $14,000 and $28,000 (in today's dollars). Future years' contributions will need to be the appropriate percentage of that year's salary.

Note: If long-term inflation is about 3%, then 8% nominal return roughly corresponds to the 5% "real" - after inflation - return line on the chart. (If you're not familiar with real returns, see About Nominal & Real Rates of Return.)

The Impact of Rate of Return on Yearly Retirement Savings Needed, in Dollars

Similarly, if you earn $50,000/year, start saving at age 25, and earn 6% nominal (3% real) return instead of the 8% assumed in the previous section, your contribution will need to increase from $667/month to about $1042/month or $12,500/year in the first year. With a $100,000 salary, that translates to $2084/month or $25,000/year.

The 7% real (10% nominal) return line is included as an upper limit. Over very long periods of time, 50 years or more, a theoretical 100% stock portfolio has returned about 10%. However, few planners would recommend a 100% stock allocation.

These results are based upon your actual returns, not on what you planned to earn. So, be realistic; choose expected returns that are consistent with historical returns for asset allocations similar to yours.

What's My Target? How Much Will I Need to Accumulate By The Time I Retire?

To determine how much you need to save by your retirement date, see the appendix at the end of How Much Money Will You Need To Retire?  These are the amounts that the 4% withdrawal approach would recommend you have in order to retire at age 65 -- and the amounts the above savings rates are designed to achieve.

The Key Assumptions

This post illustrates the impact of two important factors in retirement planning: when you begin saving for retirement, and how much you earn on your investments -- assuming you won't have a pension or Social Security.

To provide a quick overview of the impact, I've assumed some typical values for some of the other critical factors. I've assumed you will retire at age 65, and spend about 75% of your current annual income (adjusted for inflation) each year in retirement. In addition, I've assumed that you plan to withdraw 4% of your retirement portfolio to fund your first year of retirement expenses, and increase that amount by inflation each year thereafter (For a more detailed discussion of the 4% withdrawal approach and my assumptions, see Assumptions for the 4% Withdrawal Retirement Graphs).

What If My Situation is Different? e.g., What If I Already Have Savings?

I've assumed that you currently have no retirement savings.  If you already have significant retirement savings, see How Much Should I Have in Retirement Savings?

Even if my other assumptions are a little off in your case, they'll likely at least put you in the right ballpark (unless you will have a pension or Social Security). However, for a more accurate estimate, and to get a better feel for the impact of some of the variables, I encourage you to enter your own data into my simple retirement savings calculator. The "big picture" will probably remain the same; specifics of your situation, such as your expected spending level in retirement, can make a significant difference.

What If I Am Eligible to Receive Social Security?

Having a pension or Social Security makes a big difference.  See What Percent of Your Yearly Salary Should You Save For Retirement? (with Social Security), or What Percent of Income Should High Income Earners Save for Retirement?. If you are eligible for Social Security but want to assume a reduced amount, see My SIMPLE Retirement Savings Calculator.

Other Related Materials:

How Much Should I Have in Retirement Savings? (by age) companion post to this one.
My SIMPLE Retirement Savings Calculator An interactive calculator tailored to your individual circumstances using these same concepts. 
Do You Need a Personal Strategic Plan? a process for establishing your life priorities

Start Retirement With a 4% Withdrawal Rate A discussion of the 4% withdrawal concept, from Time Magazine. For a more detailed discussion, see Wikipedia.

For lists of other popular posts and an index of stock market posts, by subject area, see the sidebar to the left or the blog header at the top of the page.

Copyright © 2012                   Last modified: 12/1/2020

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