How Much Should I Save for Retirement?

When thinking about how much to save for retirement, the first step is to estimate how much income you'll need once you retire. Since expenses and spending tend to go down in retirement, you may not need to replace all of your working income. For example, if you make $50,000 a year, you'll need to replace about 60% of it in retirement. If half comes from Social Security, your personal savings will need to cover the other half. So how much should you save to reach this goal? Well, there are two important factors that will come into play. The first is when you start saving, and second, how much you earn over your working life. Our research shows that it's best to start saving early. The reason is that by saving earlier, your money has more time to grow. If you start saving later, you'll have to increase your savings rate in order to catch up. Our research also shows that you need to save more as you earn more. If you're 25 and currently earning $50,000 a year, you can start out with a 7% savings rate. As your earnings increase, you can adjust your savings rate upward. So, 11% at 75,000, 15% at 100,000, and so on. And keep in mind, this includes any 401k match from your employer. In order to stay on track, it's a good idea to monitor your progress and adjust your savings rate accordingly. One way of doing this is to divide your savings by your current annual income. For example, at age 45, your retirement savings should be about 2.8 times your annual income. And by age 65, you should have accumulated 6.7 times your annual income. Of course, these are general estimates. But once you have your framework for monitoring progress, you can determine whether you need to save more to make up for lost time, or you can also reduce your savings rate because you're ahead of schedule. So the key points to retirement savings are: saving early and consistently, saving more as you earn more, and monitoring your progress. At Dimensional, we feel this dynamic approach to savings can help you pursue your retirement income goals.