How Much Should You Save for Retirement?

The standard used to be 10-15% of your income should be saved for retirement. That still might be a reasonable standard if you start early enough, your investments perform well, and you’re confident that Social Security will provide a healthy boost to your retirement income.  There isn’t really a one size fits all standard on how much you should save for retirement. Many different factors come in to play such as how early you start saving, how much you plan on spending in retirement, what returns you’ll get on your investment, how long you’ll be retired, and so on.  Since I didn’t start saving until age 39 and don’t have much confidence that I’ll receive a full benefit from Social Security I need to save more than 10-15% of my income.

I made approximately $12,000 last year and invested $4,000 in my Roth IRA.  That is a savings percentage of 33% of my income.  That isn’t bad but I still need to increase my income or savings percentage or both if I want to retire.  I’d like to retire before I’m 50.  I’ll be 41 this month which only gives me nine years to save enough money.  That makes my goal a longshot but I have some ideas how to make it more probable that I’ll share in another post.  My total invested in my IRA will most likely be smaller this year but my savings percentage will likely be about the same.

I see some people that save much larger percentages of their income.  These are usually people with much larger incomes than me.  I’ve developed another way of measuring percentage of income saved that levels the playing field somewhat between large and modest incomes.  I look at what percentage of income above the federal poverty level was saved for retirement.  The federal poverty level for 2008 for one person is $10,400.  My income was $12,000 and I saved $4,000 so my savings percentage was over 100% of my income above the federal poverty level.  I don’t think there are a lot of people matching that although I’m sure there are some.

In summary how much you should save depends on your circumstances.  In my opinion you should save at least 20% of your income and if you want to retire early you should save much more than that.