Planning for retirement is one of the most critical aspects of financial health. The earlier you start saving, the better your chances of accumulating a sufficient nest egg to maintain your lifestyle after you stop working. But how much should you actually be saving for retirement? The answer depends on factors like your current age, income, desired retirement lifestyle, and life expectancy.
The general rule of thumb is to aim to replace about 70-80% of your pre-retirement income. For example, if you earn $100,000 annually before retirement, you’ll likely need around $70,000 to $80,000 per year in retirement. This amount should cover living expenses, medical costs, and any leisure activities you plan to pursue. To calculate exactly how much you should save, Fidelity suggests aiming to have saved at least 1x your salary by age 30, 3x by age 40, 6x by age 50, and 10x by age 67. You can find detailed retirement savings guidelines from Fidelity here.
One of the easiest ways to save for retirement is through employer-sponsored retirement accounts like 401(k)s. A 401(k) allows you to contribute pre-tax dollars from your paycheck, lowering your taxable income and growing your savings tax-free until you begin withdrawals in retirement. Many employers offer matching contributions, meaning they will match a portion of what you contribute to your 401(k)—essentially free money that accelerates your savings growth.
If your employer doesn’t offer a 401(k) or if you want to supplement your retirement savings, consider opening an Individual Retirement Account (IRA). IRAs come in two varieties: traditional and Roth. Contributions to a traditional IRA are tax-deductible, and the money grows tax-free until retirement. However, you’ll pay taxes on withdrawals. With a Roth IRA, contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.
It’s also important to factor in healthcare costs when planning for retirement. Health expenses tend to increase as you age, and Medicare only covers certain medical needs. Consider investing in a Health Savings Account (HSA) if you qualify, as it offers tax advantages similar to retirement accounts while covering medical expenses.
By understanding your retirement needs and taking advantage of retirement savings tools, you can ensure that you’re financially prepared for the future.
Ethan Rogers