What Percent of Your Income Should You Save For Retirement? (by starting age, with Social Security)

Here's an easy to use graph that suggests the percent of your income to save for retirement depending upon the age you start saving. It's based upon the commonly used 4% withdrawal approach to retirement savings, and designed for a typical wage earner who is planning to receive Social Security. Other posts address saving percentages for higher income earners, and those without Social Security. For other situations, see the end of this post.

Most people do not save enough for retirement. Sixty percent of older women have trouble covering their basic monthly expenses. Nearly half of Americans die with virtually no financial assets. Waiting too late to start planning & saving for retirement, or not saving enough, can be the difference between having a secure, comfortable retirement and spending your golden years in poverty.

Some Benchmark Retirement Saving Rates for Typical Employees with Social Security, by Starting Age

Annual Retirement Savings Percentage Needed (w Soc Sec)

Even With Social Security, You Will Need to Start Early, and Save A Significant Percent of Your Yearly Salary

The previous post in this series showed results for workers without a pension or Social Security. However, about 90% of American workers do have Social Security; it typically replaces roughly 40% of their pre-retirement income (not the at least 70% of pre-retirement income normally assumed to be needed). Even so,
this is a huge advantage, a) because it reduces the amount of income their savings need to replace, b) because it is a more reliable, less volatile, source of retirement income than investment income, and c) because it is lifetime inflation-adjusted income (many pensions do not include cost of living adjustments).

Still, the graph above (click to expand) suggests that even if you expect Social Security to replace 40% of your salary, in order to retire in the style that you are accustomed to:

• You will likely need to save more than 7.5% of your salary each year unless you start before you are 30, and/or earn a higher than average return on your investments.
  
• If you wait until age 30-35 to start saving for retirement, you'll probably need to save around 8-15% of your salary each year.
  
• Wait until age 40-45 and you're looking at saving 15-25% of your gross income each year.

How Much Should You Save Yearly for Retirement, in Dollars

For this post, I've assumed that you earn about $40,000/year, and have Social Security but no pension. (See  this post if you earn more)  In that case, start your retirement savings at age 30, and earn the 8% nominal (5% real) return typically assumed by retirement planners (the middle line on the graph) and you'll need to save about 8% of your salary. That's $3,200/year or $265/month. Plan to increase that contribution each year to keep up with inflation.

Start later, and you will need to save more. Earn a lower return? You'll need to save more. The point is, even the typical Social Security recipient faces a significant savings challenge since Social Security will only replace about 40% of his income. And, remember, this is just retirement savings. Saving to buy a house? for your kids' education? That's extra!

If You Earn More Than $40,000 Plan To Save Even More!

The graph in the previous post was independent of salary. Unfortunately, this one is not.

Under current rules, an employee earning $40,000/year will receive about $15,725/year in Social Security benefits (in current dollars) if he retires at age 65; Social Security will replace about 40% of his pre-retirement income. This is right in line with the average Social Security recipient -- which is why I chose that salary level for this post.

However, the percentage of pre-retirement income that Social Security replaces decreases as your salary increases. Earn $50,000 and your income replacement rate drops to 37%; at $100,000, it's 25-26%; at $250,000, it's down to 11%. And, of course, as Social Security's contribution to your retirement income decreases, your contribution has to increase. To see the impact, see What Percent of Income Should High Income Earners Save for Retirement?

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

For targeted savings levels for all salary levels, see How Much Money Will You Need To Retire?  These are the amounts that the 4% withdrawal approach would recommend you have in order for your savings to last for 30 years -- and the amounts the above savings rates are designed to achieve.

Your Results May Vary: Some Key Assumptions

I've assumed that you:

• Start with no retirement assets
• Have only one income earner in the family
• Invest a constant percentage of your then-current salary each year until retirement
• Earn the assumed pre-retirement rates of return (3, 5, or 7% after taxes, expenses, and inflation)
• Retire at age 65, receiving 75% of your current annual income (inflation-adjusted) in retirement
• Start by withdrawing 5% of your assets your first year in retirement, and increase that amount by inflation each year thereafter.

The standard assumption these days is 4%, not 5%; I assumed 4% in the previous post. However, if Social Security is expected to cover over 50% of your yearly expenses in retirement, as in this case, you may be able to afford to be a little more aggressive. Ideally, I'd still try to target a 4% withdrawal rate.

For a more detailed discussion of the 4% withdrawal approach and my assumptions, see Assumptions for the 4% Withdrawal Retirement Graphs.

What If I Can't Save This Much?

We'll discuss some options in future posts. For example, delaying retirement will reduce the amount that you need to save.

The Retirement Planning Interactive Calculator: 

For an estimate more tailored to your specific circumstances, 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.  For example, suppose you are eligible for Social Security, but expect reduced payments in the future.  Other specifics of your situation, such as your pre-retirement investment returns and expected spending level in retirement, could also make a significant difference. The graphs are better for seeing the "big picture."

Related Materials:

How Much Money Will You Need to Retire? The bigger picture. An overview that calculates the "ending" targets for all salary levels (using 4%, not 5%, withdrawal rates).
How Much Should You Have in Retirement Savings? : to monitor your progress along the way.
What Percent of Your Salary Should You Plan to Save For Retirement, by starting age: similar to this post, but for those without Social Security
What Percent of Income Should Higher Income Earners Save For Retirement?
My SIMPLE Retirement Savings Calculator: interactive calculator tailored to your specific circumstances

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.
Social Security Income Estimator : the official site.  For an approximation, see this site, or my graph.

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: 12/2/2020

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