It can be really complicated trying to figure out how much you should save for retirement. Some rely on conventional wisdom that tells you to save 10% of your income to put toward retirement. Saving 10% is supposedly enough to support you when you finally reach retirement age.
However, the math doesn’t quite add up, and we’ll explain why.
Why Saving 10% For Retirement Isn’t Going to Cut It
When you start saving for retirement, your age and income play a big role. Whether 10% would actually be enough depends a lot on how much money you make, and when you start to save up for retirement.
If you started to consistently save 10% of your annual income starting at the age of 30, the chart below will show you how much you could expect to save, assuming you earn a 7% annual return on investment, a 2% raise each year, and that you retire by the time you reach the age of 65.
The chart also shows how much income such a nest egg would produce if you follow the 4% rule, withdrawing 4% of your savings each year to keep up with inflation.
It also shows how much income you’d need to have during your golden years, and assumes you’d want to replace 90% of your final salary earned during the year before you leave the workforce.
Starting Income at the Age of 30
Savings Earned at the Age of 65
Retirement Income if You Follow the 4% Rule
Income Necessary for Retirement
As you can see in the chart, you’ll face various income shortfalls ranging from $33,697 to almost $90,0000. While you’ll have earnings coming in from Social Security benefits, that won’t be enough to make up for those shortfalls.
Saving More Than 10% Can Make a Huge Difference When You Retire
Many experts these days believe the conventional wisdom of withdrawing 4% of your savings each year is actually too much. If you withdraw anything at all, it needs to be much less to help ensure that you don’t run out of money before the end of your retirement years—and life expectancy has gotten longer.
Instead of making the assumption that 10% in retirement savings each year will be enough, do your homework and take the time to figure out how much you’ll actually need.