How Much Should You Have Saved Based on Your Age and Income?

“How much should I have saved by retirement?” It’s a question we get asked all the time, and it is definitely a valid one. Of course, it’s also a very difficult question to answer.

The truth is that everybody’s retirement number is different. The amount of money that you need to retire is based on a whole slew of different factors. There are a bazillion different retirement calculators out there, all trying to help you estimate how much you’ll need to retire. Each one is different, and they all allow for different levels of detail. You can make adjustments for inflation, pension payment, growth rates, social security, living expenses, and anything else you can think of. With so many options, you can practically make them say anything you want. So, how accurate can these calculators be?

Rather than get too far into the weeds, let’s try and simplify things. Here’s the deal: Most people get used to living a lifestyle that is largely based on their income. Some people can certainly live on less, but very few of us are going to want to decrease our lifestyle once we retire. In fact, the opposite may be true. Many of us want to do more. We want to do things we never had the chance to do during our working years, like enjoying more travel and leisure activities.

So, instead of trying to accurately predict every last variable, why not try to determine if we are doing a good job of saving based on our age and income? Once we do, you’ll have a very simple way of checking whether or not you’re on track. Let’s get started!

The Methodology

In part, I have borrowed this methodology from my friend Sam at Financial Samurai. In his model, he errs (I think rightly) on the conservative side. In my model, I’ve made a few tweaks and even went a little more conservative – shortening the number of years worked and extending the years in retirement. In any case, I’d rather have more than I need than run out too soon.

Of course, to make our calculations, we have to make a number of assumptions. Here are a few:

• Age Range/Number of Years Worked: These figures assume that your working life will last 40 years. We’re going to give you a pass for the first few years of your 20s and assume that you either start working or saving at age 25. We also assume that you work 40 years and retire no later than 65.
• Number of Years of Retirement: We’ve assumed that we want our money to last for 30 years of retirement, which is a very conservative estimate. Thus, if you retire at age 65, your money will last until age95. If you want to retire at 50, your money will last until 80 – but the total dollar figure that you need stays the same as if you worked to 65. So, if you need $1.5 million for 30 years of retirement after age 65, you still need $1.5 million to retire at age 50 in order to enjoy those same 30 years. To get there, you need to save more aggressively, get better returns, or both. If you want your money to last for a shorter time period, adjust the multiple accordingly.
• Rate of Savings: If you want to live comfortably in retirement, you need to save aggressively now. We are going to assume that you’re going to continue living at or below the level of your income prior to retirement. These numbers can be looked at as liquid savings or total net worth. Our numbers are based on saving a minimum of 20% of your annual income. We aren’t really focused on the rate of return, but rather on the total dollar amount you should have saved in order to pay for 30 years of retirement. (Just for your reference, we assume a modest 6.25% rate of return over 40 years at the 20% savings rate to assist with the multiples.)
• Rate of Withdrawal: The best-case scenario is that your returns during retirement will outpace inflation and the amount you need to withdraw to live. Thus, you’ll never touch the principle and your money can keep growing indefinitely. We are going to assume that your investments simply mirror inflation and that you withdraw 3% of your principle annually (3.33% to be more specific). Again, these numbers assume you continue living at or below the level of your income prior to retirement.
• No Additional Sources of Income: These figures do not include any additional sources of income such as social security, pension plans, inheritance, money from rental properties or other investments, etc. If you plan to receive additional income during retirement, adjust the numbers accordingly.

Saving in Your 20s

We can all agree that somebody who makes $100K should be able to save more total dollars than a person who makes $50K, correct? Thus, the only good way to calculate whether or not you are on track with your savings is to use a multiple of your income based on your age. In that way, we are able to compare apples to apples.

Just to be clear, since we assume you’re going to live at approximately the same lifestyle level you did prior to retirement for 30 years, your ultimate retirement number is equal to 30x your annual average salary. So, if you make $100K (or live like your making $100K), our conservative estimate is that your net worth should be equal to $3 million in order to enjoy a very comfortable 30-year retirement. If you only want to prepare for 25 years of retirement, then your total net worth at retirement should equal $2.5 million. Let’s take a look at some benchmarks to see how you can get there.

As I mentioned earlier, these figures give you a pass for the first few years of your 20s. Feel free to wander the globe, live in your parent’s basement, or go to work and simply not save. However, the earlier you buckle down and start saving, the earlier you’ll reach your goal. So, if you plan to retire at 65, you should have about 1.13 times your average income saved by the time you reach 30 (or after 5 years of work). Not too bad. Remember, this is saving at no less than 20% per year.

Let’s talk quickly about the “average income” number. Obviously, for most people, their income will fluctuate over the course of their careers. If you want a little more accuracy, consider this number as the weighted average of your income. Thus, if you make 50K for 10 years and 75K for another 5, your average weighted income is $58,333. Here’s the calculation:

($50,000 x 10 years) + ($75,000 x 5 years)/15 years = $58,333

Obviously, the math doesn’t usually work out quite so cleanly, but you get a general idea. Again, we aren’t trying to be exact here. We’re just trying to get a good estimate.

Saving in Your 30s

Now is the time when your career is probably starting to take off. It’s also the time when you really need to be pumping money into your savings, especially if you want to retire early. Try and resist the temptation to increase your lifestyle. Instead, save as much as you can. The more money you can sock away now, the better.

Saving in Your 40s & 50s

Here is the meat of your money-making years. You’ll be well into your career, which generally makes you more valuable. As a result, you’re probably going to be earning more.

Notice how much you should have saved. If you look carefully, you’ll notice that those savings goals are more than just a flat 20% of your income. That means that in order to get to this point, you must be getting a return on your money. Hopefully, you started making these types of investments way back in your 20s. If you did, the magic of compounding is really going to start working for you. Also note that, if you make $100K but live like you make $50K, you can have over 30 years of retirements savings piled up by age 55!

Saving in Your 60s

Retirement is here. How did you do?

Study those last few years before retirement. If you make $100K, we expect you to add $650K to your net worth in just 5 years. There is absolutely no way to do that unless you invested early and often.

Here is the entire table for your reference:

Wrapping Up

Again, these are very conservative estimates, and they are only meant as guidelines to help you hit your retirement numbers. Of course, your actual number will vary depending on your particular circumstances, lifestyle, and retirement goals. However, by using the multiples provided, you should be able to use your age and income to gauge whether or not your savings and net worth are on track to meet your retirement savings goals.

What do you think? How does your net worth/savings compare to these numbers?