How Much Should You Save for Retirement?

It’s what many people want to know, and most struggle to figure out: How much should I save for retirement?

If you could nail the answer exactly, your retirement worries would probably disappear: The ability to tell the future is bound to bring on enough wealth to fund those later years. Planning for retirement is so difficult precisely because you can’t predict the unknowns, like how long you’re going to live or what sort of medical expenses might come your way. But you can get very close to a retirement savings goal with some useful tools and a little educated forecasting.

Here are five steps toward figuring out how much to save for retirement.

1. Estimate future spending

Fair warning: This is the step that involves the most work — but power through, because the others are a breeze. And if you keep even a loose budget, you already have a leg up. Projecting future expenses begins by taking a look at current spending.

To do that, enter your monthly expenses in a spreadsheet, or jot them on a piece of paper. For those that vary, use an average. Then do a little thinking about whether they’ll stay the same, go down, go up or — best of all — disappear altogether. (In a perfect world, we’re looking at you, mortgage.)

In a second column, write your best guess of what each expense will be in retirement. Then list other things you may not budget for now but want to spend money on in retirement, like travel, golf, mahjong and ballroom dance lessons. Add up that column of projected retirement expenses, and you have a rough idea of your monthly spending needs down the line, which you can then turn into an annual number.

2. Use projected spending to decide how much income you’ll need

Less than half of workers have tried to calculate how much money they need for retirement, according to the Employee Benefit Research Institute’s latest retirement confidence survey.

That means we’re fully aware that some 50% of you are not going to do the exercise outlined in step 1. And that’s when we fall back on income replacement rules of thumb. They’re not as accurate, but they’re far better than nothing — though you should use them knowing they’re a one-size-fits-all solution to a problem that comes in many shapes and sizes.

The one used most often is the 80% rule, which says you should aim to replace 80% of your pre-retirement income. Your pre-retirement income isn’t what you earn now; it’s the average of what you expect to earn in the 10 years leading up to retirement. (Here’s a calculator to help you make that kind of projection.)

This is a loose rule: Some people suggest skewing toward 70%; some think it’s better to aim for a more conservative 90%. To figure out where you land, consider what percentage of your income you’re currently saving for retirement. You’ll no longer have to do that once you cross the hypothetical finish line, which means if you’re saving 15% now, you could easily live on 85% of your income without adjusting expenses. Add in Social Security and you may be able to adjust that down even further.

The best way to use a rule of thumb like this is as a gut-check against the more tailored approach of taking a deep dive into your expenses — are you way off the standard advice or pretty close? — but it can also be used as a starting point of its own, and then you can wiggle the numbers from there.

3. Use a retirement calculator

If you’re honest about your inputs, a good retirement calculator will give you an assessment of where you stand in your savings progress, by combining those annual spending estimates with projections. Most thorough calculators have assumptions baked in that are based on research: There will be defaults for inflation projections, life expectancy and market returns.

But to get the most accurate result, you should consider whether those assumptions are correct given your situation: Is your investment strategy poised to hit the default return used by a calculator, which will probably hover around 6% or 7%? If you’re skewing toward bonds, you’re going to want to adjust that down. Did your grandmother and your grandmother’s grandmother live to 110? You’ve got good — but expensive — genes.

All those factors come together to tell you where you’re headed and how you could improve. Let’s look at some examples, using the NerdWallet retirement calculator:

• A 25-year-old who has $10,000 saved, earns $50,000 a year and wants to replace a little less than that level of income will need about $2,833 a month in retirement. Saving 12% of his income — a number that adds up to around $500 a month, and can include employer matching dollars — will allow him to retire by age 68.
• A 35-year-old who has $30,000 saved, earns $70,000 a year and wants to replace a little less than that level of income will need about $3,670 a month in retirement. Saving 17% of her income — $1,000 a month, again including matching dollars — will allow her to retire at age 68.

What stands out in these examples: The earlier you start saving, the less you have to save, per month and overall. That’s because of compound interest. Unfortunately, investment fees also compound over time, in some cases to the tune of over half a million dollars, according to NerdWallet research. If you’re unsure how much you’re paying in fees, run your 401(k) through our fee analyzer.

The other thing worth noting is that these per-year percentages can be an average — you may find that some years require you to dial back your savings contributions, while others are flush. Our income and our expenses tend to ebb and flow. The most important thing is to save as much as you can, when you can, and invest through tax-advantaged retirement accounts like a 401(k) or IRA. If you’re not sure which of those accounts is best for you, check out this article on IRA vs. 401(k).

4. Jot down a retirement plan

It doesn’t have to be fancy or formal, but putting some of what you’ve learned in steps 1 through 3 into a written retirement plan will probably help you stay the course. About half of people who have one of these feel very prepared for retirement, as opposed to 17% of those who don’t have a written plan, according to LIMRA, a financial services and insurance association.

This is a long savings journey, and it’s very easy to convince yourself that short-term purchases won’t hurt your chances of reaching a goal that is 30, 40 or even 50 years away. Buy the shoes today, save for retirement tomorrow — but saving tomorrow doesn’t always happen.

Enter that plan, which will remind you of your goals. Stick it on your fridge. Cut out a picture of the beach house you want to piddle around in, or the sweatpants you’ll wear daily when you no longer need to go into an office.

5. Revisit regularly

Circumstances change, and your retirement needs will change with them. Whether it’s a new job, a new baby or a new passion to travel the world once you hit 65, it makes sense to perform these retirement calculations fairly often.

If you’re like us, and you get a kick out of this sort of thing, that might mean running the numbers every few months to keep up with how much you should be saving for retirement. Otherwise, every year or so will do the trick. It’s always better to adjust as you go, rather than struggle to catch up.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.

This article was updated on May 19, 2016. It was originally published Sept. 28, 2015.