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Retirement can account for one-third or more of your clients’ adult lives, and those years are not cheap. Property taxes rise in tandem with increasing property values. Then there are health care and increasing prescription drug expenditures on top of long-term care expenses.

It’s no surprise that most Americans do not have enough money saved for retirement. According to the National Institute on Retirement Security, more than 75% of Americans don’t save enough for retirement, and 21% don’t save at all.

But how can we determine how much a client needs to save for retirement? 

Let’s take a deeper look at the most important retirement savings standards to help figure out how much one should have set aside for retirement at various phases of life.

Walking your client through these four steps can help them figure out how much to save (and, eventually, how much to withdraw):

1. Calculate the items your savings will pay for once you've retired.

Knowing how you want to live in retirement may allow you to sort out how much money you'll require to support that living. If you wish to explore the world in style, you'll need a larger budget than somebody who wishes to watch birds from their backyard every morning.

Most of the costs you had before retirement will be covered by your assets in retirement. A few of them are:

  • Food.
  • Shelter.
  • Clothing.
  • Transportation.
  • Utilities.
  • Health care.
  • Insurance.
  • Travel.
  • Gifts.
If none of these areas is expected to decrease in retirement, you should have a decent notion of your budget. If you have significant plans for your retirement years, you'll need to figure out how much your new way of life will cost.

Don't forget to plan for debts you might incur after retirement. For example, if you are using credit cards, you need to pay off credit card bills in full each month to avoid interest charges or late fees. If you experience heavy credit card debt, you might want to ask a legal expert about how to settle credit card debt once and for all.

Don't forget to factor in inflation and how it will affect your money. For example, inflation rates in 2021 exceeded 6%, the highest in decades. While this is significantly higher than the average over recent decades, you should factor in annual inflation of about 2%.

2. Calculate how much you should save each year.

Now that you know how much money you'll require, you can figure out how much you should save each year.

Aiming for a multiple of your annual earnings is a straightforward method to calculate your savings objectives. While the exact amount depends on your estimated retirement costs and the individual investments you chose for your retirement portfolio, these figures might help you get a clearer idea of where you stand.

According to Fidelity Investments, you must set aside at least 15% of your pretax income for retirement. Many other financial planners suggest saving at a similar rate for retirement, and findings from Boston College's Center for Retirement Research back this up.

On the other hand, preparing for retirement isn't always as simple as putting aside 15% of one's earnings. The 15% rule of thumb assumes various things, including that you start saving in the early years of life. You'll need to start saving at age 25 if you intend to retire by 62, or at age 35 if you wish to retire by 65.

It also implies that you'll need an annual income of 55% to 80% of your pre-retirement salary to live a comfortable retirement. More or less may be required based on your spending patterns and medical bills. For many people, though, 55% to 80% is a good approximation.

Finally, the 15% rule will not give you a retirement fund that will cover all of your expenses. Social Security, for example, will most likely provide a portion of your retirement income. Overall, the 15% projection should give you a regular retirement income that lasts into your early 90s, at roughly 45% of your pre-retirement salary.

Not everyone can begin saving at the age of 25 or continuously save 15% of their income toward retirement. To compensate for the lack of time and accumulation, you may need to work longer, eliminate more costs, or put more of your income into retirement if you begin saving later in life or save a little less.

Fidelity offers some easy retirement savings standards by age to help measure your retirement saving progress, regardless of when you start saving or how much you can put away.

Age Multiple of Annual Salary Saved
30 1X
40 2X
45 4X
50 6X
55 7X
60 8X
67 10X

3. Consider other sources of income.

For retirement, there are various savings methods and income sources to consider. These factors can influence how much you require to save now, based on your sources of income.

  • An IRA. Individual retirement accounts (IRAs) are available from various financial organizations, including banks, credit unions and brokerage firms. Traditional IRAs and Roth IRAs are the two most common varieties. Each has its own set of tax benefits based on your particular circumstances. In 2022, individuals can deposit up to $6,000 per year to an IRA, which can be used to invest in various assets and even real estate. If you're over 50, you can contribute up to $7,000 each year to an IRA.
  • A pension plan. A pension plan might also offer you a regular income source. If your company offers one, find out if you meet the criteria, how much money you'll get, and the pension criteria.
  • A 401(k). These employer-sponsored investment instruments let you save and invest up to $20,500 per year (in 2022) for your retirement, or up to $27,000 if you're over 50. Your contributions to a 401(k) can be invested in a range of diverse securities, and your company might match your contributions. At age 59½, or sooner with certain restrictions, funds can be given without penalty.
  • Annuities. Annuities are a form of insurance against running out of money in retirement that may contain an investment component. After the purchase of an annuity, you will get regular payments over your retirement life.
  • Social Security benefits. Social Security benefits are available to retirees 62 and older (or those who become disabled or blind) who have worked long enough to accumulate sufficient credits to be eligible for the program. This can give a reliable source of income throughout retirement.

4. Follow the rules of thumb.

While every client's situation is different, here are a few basic guidelines to consider.

A. Consider retirement income as a proportion of pre-retirement earnings.

Many financial experts suggest that you may spend 70% to 80% of pre-retirement income annually in retirement. This means that if you earn $60,000 per year now, you should budget between $42,000 and $48,000 each year when you retire.

This isn't a hard-and-fast rule, and you might need to set aside considerably more money. Many people require income sources (or savings and investments) that cover 80%, 90% or even 100% of their pre-retirement budget. Everything is dependent on your current and future spending.

B. Set aside 15% of your earnings every year.

If you initiate retirement savings soon enough, a 15% annual contribution rate may be adequate to accomplish your objectives. If you're behind schedule, you'll likely need to save a lot more money every year to catch up.

Tolen Teigen, chief investment officer of FinDec, a financial planning firm, argues that as people get older, the amount they require to save for achieving the same end objective roughly doubles every 10 years.

C. When you reach retirement age, you should have saved 10 times your current annual income.

As previously stated, many financial consultants and firms such as Fidelity recommend that you have saved around 10 times your yearly wages by the time you reach retirement age. While this may not be exactly what you're looking for, it's an excellent goal to keep in mind. You can always change it based on your predicted retirement needs.

D. Follow the 4% rule.

You can also apply the 4% rule, which states that you can withdraw about 4% of your retirement savings in the first year of retirement.

So, if you have $1 million in savings, you would withdraw $40,000 in your first year of retirement, either in one lump sum or over time. You could modify this amount higher in succeeding years of retirement to maintain pace with cost-of-living raises.

The notion is that if you stick to this rule, you won't run out of money in retirement. The 4% guideline is designed to ensure that your funds are likely to last for at least 30 years.

The following formula is used to generate retirement savings based on the 4% rule:

Retirement savings target = annual income required times 25.

It's worth noting that there has never been agreement on a generally applicable 4% withdrawal rate. Bill Bengen, who conducted the research on which the rule is based, suggests a withdrawal rate of 4.4% to 4.5% could be prudent, while Morningstar recommends a 3.3% withdrawal rate as a rule of thumb.

The rule is based on the assumption that you'll take out the same amount of money every year in retirement, adjusted for inflation. It also assumes that your portfolio will be evenly between stocks and bond.

A Few Words of Wisdom

There is no fixed approach to calculating a retirement savings target. It will depend on the fluctuating performance of your investments, so it may be difficult to predict your exact income needs.

The first step in adequately saving for retirement is to figure out how much money you'll need. This entails assessing current and prospective expenses and determining how much money you can set aside each month. You could also diversify your savings and investment vehicles and income streams.

You should have saved roughly 10 times your present pay by reaching retirement age. Reduce your yearly costs as much as possible before retirement. This can help you extend the life of your retirement money even further.

You should keep in mind that not all retirement plans are equally successful in providing income streams. If you take out any cash from your regular IRA or 401(k), it will be considered taxable income. Any funds you get from a Roth IRA or Roth 401(k), on the other hand, are generally not taxed at all, which may affect the calculations.

There are several other things you need to consider. Many employees are forced to retire early due to unavoidable circumstances. For example, the COVID-19 pandemic has caused roughly 3 million employees to retire earlier than planned. Apart from that, layoffs, health hazards, lack of performance and other factors can push older employees into early retirement.


Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney.