How Much Do You Really Need to Save for Retirement?

One of the most commonly discussed topics in personal finance is knowing how much you need to save for retirement. Many news articles give specific numbers, with $1 million being a very common target. Those articles are meant to frighten: You need at least a million, they say, and the average person nearing retirement has saved only a fraction of that!

The trouble with target savings numbers is that they are typically aimed at a mass audience. Some individuals in the audience may need less than recommended for a comfortable retirement. Or, conversely, others may need much more. The amount you need for your dream retirement depends on a great number of factors that are specific to your unique financial situation.

These predictions can cause problems. If someone has a modest lifestyle and lives in an area that has a low cost of living, $1 million may be far more than they need. If they believe they must have that million, they might keep working longer than necessary and, when they finally do retire, might spend their days mired in anxiety because they unnecessarily think they don’t have enough put away.

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The opposite can also be true. A person who enjoys traveling the world, eating at high-end restaurants and who lives in an expensive area could find themselves in real trouble if they think they need only $1 million to retire. In both cases, generic advice could cause retirement problems.

Which guideline should you follow?

In general, one-size-fits-all advice is unlikely to fit everyone. You might be lucky enough to find generic advice that happens to be right for you, but why take that risk? This doesn’t mean everyone should be consulting with a financial adviser from the beginning of their working lives, but it does mean you should be choosy about which guidelines to follow.

If you were to take advice from someone who doesn’t know you or your situation, benchmark-based tips are often the wiser choice. Rather than aiming for a specific generalized number, consider aiming for target benchmarks. It’s more reasonable to set salary-based and age-based goals than it is to assume one single number works for everyone.

If you’re in your 30s, it's a good idea to have half of your annual salary saved for retirement. Once you reach age 50, three to six times your salary is a reasonable benchmark to aim for. Of course, it’s important to be flexible when saving based on benchmarks: If you just got a significant raise, don’t panic over the idea your savings goals are now woefully behind. But do consider using the extra income to supercharge your retirement savings.

Max out any matches offered by your employer; take advantage of that free money! If you can, contribute as much as you’re allowed to your 401(k). Remember, once you turn age 50, you’re allowed to make additional catch-up contributions, which can be valuable if you weren’t able to save as much as you’d have liked earlier in your career.

Tax planning plays a big role

Of particular importance — and something often missed by target-savings advice — is tax planning. The more money you have to give the government in retirement, the more you’ll need to have saved to maintain your desired lifestyle. Roth IRAs can be a great way to avoid retirement tax traps. While you pay taxes on contributions you make now, that money will grow tax-free, and you won’t pay taxes when you withdraw the money in retirement.

The bottom line is that we all need to be saving for retirement. Social Security was never designed to completely fund our expenses in retirement, and chances are good that it will pay less in the future than it does today. This means, unlike previous generations, today’s retirement savers must plan on funding a great deal more of their retirement, which means that aiming for a specific number, even if that number makes sense today, may still result in a shortfall when you actually retire.

Benchmark-based rules of thumb can act as guardrails, keeping us from falling off the financial cliff while allowing space for variance based on our unique circumstances. The best advice comes from a financial adviser who is familiar with your situation and can model your retirement finances. If you don’t have access to that level of advice, benchmarks are a good fallback option until you do.

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