Estimates about how much the average person will need to save for retirement are all over the place, and for the most part, they are rising with inflation.
In this article, we discuss an easy retirement calculation — plus, a simple rule to help guide you.
Reasons You May Need to Save More
In May, Northwestern Mutual released a survey that said the average American thinks they will need $1.46 million to retire, which is up 15% from 2023 and a whopping 53% from just four years ago, when the number was $951 million.
Inflation actually doesn’t account for all of that jump. Other factors could be pessimism about the future of Social Security or the expectation of a longer life span.
Other possible reasons could be due to investors getting mixed signals about how much they’ll need based on an average or some extravagant retirement lifestyle that most people won’t lead.
The number you need should be specific to you and your lifestyle in retirement, but how do you arrive at that number? Some of the retirement calculations out there are confusing and complex, requiring advanced accounting degrees to figure out.
Nonetheless, here is one simple rule that will put you pretty much in the ballpark of what you’ll need.
A simple rule
A search for retirement calculators or rules of thumb will yield a lot of different formulas based on how much you should save of your income, how much you should withdraw per year in retirement, how much you’ll spend per year in retirement, and other factors.
These factors can be complicated in that they require you to figure out things you really don’t have the answers to yet.
However, there is one rule that takes very little math and no peering into the crystal ball for answers. This methodology is championed by Fidelity Investments and others. It serves more as a roadmap to see where you are rather than a calculator to determine where you think you need to be.
10 times your salary at retirement
The savings rule is based on your salary at different points in your life.
Specifically, it calls for you to have 1x your salary saved at age 30, 3x your salary saved at age 40, 6x your salary saved at age 50, 8x your salary saved at age 60, and 10x your salary saved at retirement age. That’s it.
Let’s run the numbers. If you are 30 and make $50,000 per year, you should have $50,000 saved. If you turn 40 and make $60,000, you should have $180,000 saved for retirement. If you turn 50 and make $70,000, your nest egg should be $420,000. At age 60, if you are making $80,000, you should have $640,000 saved, and at retirement, if you are making $85,000, you should have $850,000 set aside.
A guide, not an exact science
This methodology is good, not only because it gives you a number to strive for; it also lets you see where you are on the road to retirement.
Thus, if at age 50 you are not anywhere near 6x your current salary, then it means you have some work to do. On the other hand, if you have close to or more than 6x your salary saved at age 50, then you are in good shape.
This number should also serve as a guide subject to change based on your individual circumstances. If your house is paid off and you are not the kind of person that envisions buying boats and second homes, then your number will probably be lower. Additionally, if you plan to work part time in retirement, your needs will be less.
On the other hand, if you are still paying off a home or want to buy your dream house somewhere or have plans to travel the world and live a more expensive lifestyle, then you may need that full amount — or more.
The bottom line is to not get overwhelmed by the surveys and averages. Just use this simple formula and establish your own number based on your own circumstances.
