How Much Should You Save Each Year for
Retirement?
Are you on the track to a comfortable retirement?
The amount you should save each year depends on how far you
are from retirement and how aggressively you invest.
Find out how much you need to save each year
to accumulate a nest egg of the size you want by retirement
age.
Use the table below to estimate your needed
yearly savings amount. The steps below will show you how to
use it.
| Years Until Retirement |
Savings Multiplier |
Growth Multiplier |
|
5
|
18.1%
|
1.28
|
|
10
|
8.0%
|
1.63
|
|
15
|
4.6%
|
2.08
|
|
20
|
3.0%
|
2.65
|
|
25
|
2.1%
|
3.39
|
|
30
|
1.5%
|
4.32
|
The table assumes an after-tax return of
5% per year - an extremely conservative assumption. If you
are a more aggressive investor, you will need to save less.
Step One
Suppose you have determined that you need
a lump sum of $375,000 to fund your desired annual retirement
income. You are 40 years old, and want to retire at age 65.
To find out how much you must save each year
to have that $375,000 nest egg by the time you're 65, multiply
$350,000 by the 25 year savings multiplier (2.1%). You will
need to save $7,875 a year for 25 years (2.1% times $350,000
= $7,875).
If you are expecting a lump sum at retirement,
subtract that amount from the nest egg amount.
Step Two
Now suppose you already have $75,000 in a
401(k) plan or IRA. to find out what that amount will grow
to in 25 years, multiply it by the growth multiplier for 25
years (3.39). Your $75,000 will have grown to $254,250 by
the time you retire (3.39 x $75,000 = $254,250). Subtract
the $254,250 from $375,000. This amount ($120,750) is the
amount you must accumulate by the age of 65. Multiply the
$120,750 by the 25 year savings multiplier (2.1%), and you
see that you must save $2,535.75 per year to accumulate the
$120,750.
Monitoring Your Retirement
It's important to look at your portfolio
every year, since returns and inflation may not match your
forecasts. Monitor your results to make sure you're on target.
Catching up
What if you have too little currently saved?
To catch up, boost your annual savings rate.
If you are 20 or more years from retirement,
the boost won't be that high. Or increase your retirement
nest egg by delaying retirement.
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