Who doesn't have a retirement dream? Yours may be as simple as sleeping late or riding your bike on a sunny afternoon, or as daring as jumping out of a plane at age 90. Living your retirement dream the way you want means saving now—and saving enough so you don't have to worry about money in retirement.
But how much is enough?
Our rule of thumb: Aim to save at least 15% of your pre-tax income1 each year. That's assuming you save for retirement from age 25 to age 67. Together with other steps, that should help ensure you have enough income to maintain your current lifestyle in retirement.
How did we come up with 15%? First, we had to understand how much people generally spend in retirement. After analyzing reams of national spending data, we concluded that most people will need somewhere between 55% and 80% of their preretirement income to maintain their lifestyle in retirement.1
Not all of that money will need to come from your savings, however. Some will likely come from Social Security. So, we did the math and found that most people will need to generate about 45% of their retirement income (before taxes) from savings. And saving 15% each year, from age 25 to age 67, should get you there. If you are lucky enough to have a pension, your target savings rate may be lower.
While 15% may seem like a lot, if you have a 401(k) or other workplace retirement account with an employer match or profit sharing, that counts toward your annual savings rate.
Here's a hypothetical example. Consider Joanna, age 25, who earns $54,000 a year. We assume her income grows 1.5% a year (after inflation) to about $100,000 by the time she is 67 and ready to retire. To maintain her preretirement lifestyle throughout retirement, we estimate that about $45,000 each year (adjusted for inflation), or 45% of her $100,000 preretirement income, needs to come from her savings. (The remainder would come from Social Security.)
Because she takes advantage of her employer's 5% dollar-for-dollar match on her 401(k) contributions, she needs to save 10% of her income each year, starting with $5,400 this year, which gets her to 15% of her current income.
Is 15% enough?
That depends, of course, on the choices you make before retirement—most importantly, when you start saving and when you retire. Any other income sources you may have, such as a pension, should also be considered.
Now that you know a savings rate to consider, here are some things that may help you get to it.
1. Start early
The single most important thing you can do is start saving early. The earlier you start, the more time you have for your investments to grow—and recover from the market's inevitable downturns.
If retirement is decades away, it may be hard to think or care about it. "But when you are young is precisely the time to start saving for retirement," says Fidelity senior vice president Jeanne Thompson. "Even though it can be a challenge to save for the future, giving your savings those extra years to grow could make the struggle worth it—every little bit you can save helps."
2. Delay retirement
Our 15% savings rule of thumb assumes that a person retires at age 67, which is when most people will be eligible for full Social Security benefits. If you don't plan to work that long, you will likely need to save more than 15% a year. If you plan to work longer, all things being equal, your required saving rate could be lower.
"Delaying retirement has a triple benefit," says Adheesh Sharma, vice president of institutional planning solutions at Fidelity. "You have more time to save, a shorter retirement, and higher monthly Social Security benefits."
Other steps to take
The road to retirement is a journey, and there are steps you can take along the way to catch up. Here are 6 tips to get started:
To see how your age, savings, and income can influence your savings rate, try Fidelity's savings rate widget.
Make savings a priority
Keep your eye on your dreams. Do the best you can to get to at least 15%. Of course, it may not be possible to hit that target every year. You may have more pressing financial demands—children, parents, a leaky roof, a lost job, or other needs. But try not to forget about your future—make your retirement a priority too.
Next steps to consider
Take advantage of potential tax-deferred or tax-free growth.
See if your savings are on target in the Planning & Guidance Center.
Get 4 easy guidelines to help you reach your retirement goals.