What Percentage Should You Save for Retirement?
- A general rule of thumb is that you'll only need about 80 percent of your working income during retirement, assuming Social Security provides 25 percent of your income. Based on this assumption, an assumed 2.5 percent rate of inflation, an 8 percent investment earnings rate and a retirement age of 65, you would need to save 10-15 percent of your income in your twenties, 15- 25 percent of your income in your thirties and 25-35 percent in your early forties.
- The percent of savings needed to retire comfortably depends on many assumptions such as your age, whether or not Social Security will provide benefits to you and how much those benefits will be, the rate of inflation, your investment return and the number of years you plan on saving. Your age also dramatically affects the rate at which you need to save. The younger you are, the less you need to save; the older you are, the higher percent of your income you need to save.
- If you start saving money when you're young, the lower percentage of required savings stays with you up until you retire. This is because the money you continually put away for retirement compounds over time. This, in turn, keeps the percentage of income you need to save low.
- The disadvantage in saving money for retirement is if you start saving late in life. In order to make up for the loss of compound interest over time, you must save a high percentage of your income. You may not be able to afford to save roughly half of your income. In this case, you would have to keep working or try to earn a higher rate of return on your investments.
