How Much Should You Save for Retirement?

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The 70% Rule for Retirement Explained

The 70% rule for retirement savings can help you estimate the amount of income you may need in retirement. It suggests that you’ll need 70% of your pre-retirement, post-tax income to retire comfortably. Here’s what to know about the 70% retirement savings rule.

Understanding the 70% Rule

The 70% rule for retirement savings indicates that you can estimate your future retirement spending by multiplying your post-tax income by 70%. For instance, if your current post-tax income is $72,000 annually, your future annual retirement spending would be approximately $50,400, or $4,200 per month.

Actual retirement spending varies for each individual. Factors such as debt, home ownership status, and lifestyle choices can influence this percentage. While 70% is a useful starting point, it should not be considered a strict rule.

Calculating Your Retirement Savings

To determine if you’re on track with your retirement savings, Fidelity suggests using your age and income. At each age milestone, you should have a certain amount saved if you plan to retire by age 67. Fidelity’s age-based retirement savings factor assumes 45% of your income will come from retirement savings, with the remainder supplemented by Social Security.

• Age 30: Have the equivalent of your annual salary saved.
• Age 35: Have twice your annual salary saved.
• Age 40: Have three times your salary saved.
• Age 45: Have four times your salary saved.
• Age 50: Have six times your salary saved.
• Age 55: Have seven times your salary saved.
• Age 60: Have eight times your salary saved.
• Age 67: Have ten times your salary saved.

For example, if you’re a 40-year-old advertising sales agent earning the median salary of $73,260, you should have $219,780 saved for retirement. If you are promoted to sales manager by age 50 with a salary of $150,530, your retirement savings should be $903,180.

These milestones are targets and may vary based on lifestyle and cost of living changes. However, having a goal can help you stay on track.

Why 70%?

You might wonder why 70% of your post-tax income is the rule rather than 100% of your salary or another figure. Several factors contribute to this:

• You won’t have Social Security and Medicare taxes withheld from your retirement withdrawals, which account for 7.65% of your income (or 15.3% if self-employed).
• Your income taxes will be lower after retirement since your income will be reduced.
• You won’t need to save for retirement once you’re retired, resulting in fewer deductions from your monthly income.
• Your spending will likely decrease after retirement, especially on housing, debt payments, and transportation.

Tips for Saving More for Retirement

If you want to increase your retirement savings, here are some strategies:

Increase Your Contributions

Find out the contribution limits on your retirement accounts and increase your regular contributions if possible. Consider putting extra money, such as cash gifts and bonuses, toward retirement. Automating your contributions can help you stay consistent with less effort.

Take Advantage of Your Employer’s 401(k) Match

If your employer offers a 401(k) match, contribute at least enough to get the maximum match. This is essentially free money toward your retirement. Ensure you understand the vesting period to avoid forfeiting matched contributions if you leave the company early.

Open an IRA

An individual retirement account (IRA) allows you to make tax-free or tax-deferred contributions. You can contribute up to $6,500 annually, with an additional $1,000 if you’re 50 or older. There are two main types of IRAs:

• A traditional IRA allows tax-deferred contributions, meaning you won’t pay taxes until you withdraw in retirement.
• A Roth IRA allows post-tax contributions and tax-free withdrawals after five years. Contribution limits may vary based on your income and filing status.

Make Catch-Up Contributions

If you’re 50 or older, you can make additional catch-up contributions to your retirement savings. For 2023, the catch-up limits are:

• 401(k): $7,500
• IRA: $1,000
• Roth IRA: $1,000
• SIMPLE IRA: $3,500

Don’t Withdraw Money From Your Retirement Savings

Withdrawing money from your retirement savings can hinder your progress. You’ll miss out on potential interest earnings, and withdrawals from a traditional IRA before age 59½ or from a 401(k) before age 65 incur a 10% penalty and taxes. Exceptions may apply, but income taxes still apply.

The Bottom Line

Estimating your retirement spending can be challenging. Using a benchmark like the 70% rule can help set a retirement savings goal. Don’t get discouraged if you feel behind. Consistent contributions and looking for opportunities to save more can help you build a substantial nest egg.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals!

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