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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
Related Content
-
Rising AI Demand Stokes Undersea InvestmentsThe Kiplinger Letter As demand soars for AI, there’s a need to transport huge amounts of data across oceans. Tech giants have big plans for new submarine cables, including the longest ever.
-
Return to Your Home Country to Retire: Repatriation RetirementThey came to the U.S. to live and work, but they want to retire in the old country. Here's how to juggle the move back home.
-
The Three Biggest Fears Keeping Retirees Up at NightHere are the steps you can take to put those fears to rest and retire with confidence so you can relax and enjoy the life you've planned.
-
What Can a Donor-Advised Fund Do for You? (A Lot)DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
-
Estate Planning When You Have International AssetsEstate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
-
Three Essential Estate Planning Steps to Protect Your Nest EggAfter dedicating years to building your wealth and securing your future, make sure your assets are protected and your loved ones are provided for in the future.
-
Is Chasing the American Dream Ruining Your Financial Life?Too many people focus on visible affluence as a marker of success. Here's how to avoid succumbing to the pressure and driving yourself into debt.
-
Retiring With a Pension? Four Things to KnowThe road to a secure retirement is slightly more intricate for people with pensions. Here are four key issues to consider to make the most out of yours.
-
How to Teach Your Kids About the Tax Facts of LifeTaxes are unavoidable, so it's important to teach children what to expect. Also, does your child need to file a tax return for 2024? Find out here.
-
Revocable Living Trusts: The Good, the Bad and the UglyPeople are conditioned to believe they should avoid probate at all costs, but when compared with living trusts, probate could be a smart choice for some folks.
