How Much Should I Save for Retirement?

By Lisa Noah, Branch Manager

When they’re planning for retirement, investors always want to know “How much should I be saving?” This question is present throughout the entire retirement planning process: How much retirement savings should I have at 35? How about at 40 or 50? Am I retiring too early?

When it comes to something as important and unique as retirement, the truth is there's no rule of thumb that works for every person. But there are some general principles that may be worth considering:

1. The 10% Rule

If you start saving for retirement in your 20s, the 10% rule suggests that you save at least 10% of your income for the rest of your career to be able to live comfortably in retirement. For every decade you age before you start saving, the percent of your income you should put toward retirement increases by another 10%. For example, if you start saving in your 30s, according to the 10% rule you should save 20% of your income. If you start in your 40s, you should save 30% and so on.

2. The 100-Minus-Your-Age Rule (and why it doesn't work for everyone)

Another important factor to consider when planning your retirement savings strategy is not just how much you're able to save but how you're saving it. If you're only able to put 5% of your income toward retirement savings in your 20s, you may be willing to take on some extra risk in exchange for investments that offer the potential for higher returns.

According to a recent Scottrade study, 72% of investors say their biggest financial concern is getting a good rate of return on investments. So what can those investors do to address that concern?

First, keep in mind that a “good” rate of return is relative to how the market is performing and your personal financial goals. Second, when you're focusing on how your savings are invested and the potential for investment returns, it's important to think about the stock/bond mix in your portfolio. According to the 100-minus-your-age rule, the percentage of your portfolio made up of stocks should be equal to 100 minus your age.

But here's the thing: this "rule" does not work for everyone. It doesn't take into account your personal financial situation, how you feel about risk or your goals. And, while this principle may be applicable for working investors, it may not be the right rule for retirees. Most retirees will likely want to be invested much more conservatively than the 100-minus-your-age rule calls for if their retirement portfolio is their primary source of income.

Instead of basing your portfolio off of a generic rule, think of the principle behind the rule: asset allocation. The asset allocation of your portfolio plays a huge role in determining the returns you see and how much you’ll need to contribute. If you can accept a little more volatility in your portfolio, you may be able to contribute a smaller percentage. If you prefer an asset allocation that targets more steady growth with less volatility, you might want to contribute a higher percentage of your income.

To learn about choosing an asset allocation that matches your unique financial strategy, read How to Save for Retirement.

3. Think Beyond Generic Rules and Develop a Rule for Yourself

While the exact amount you should save varies based on factors such as your income, your desired retirement lifestyle and your ability to understand and accept market volatility, it might be helpful to establish a benchmark for yourself. Set realistic goals like, "By the time I'm 40, I want to be contributing 10% of my income to a retirement savings plan" or "By the time I'm five years from retirement, I want to be comfortable enough with my retirement portfolio to scale back and focus on investments that tend to be less volatile."

And, when you’re figuring out exactly how much you should save to be comfortable in retirement, think about your personal situation. Ask yourself:

• When do you plan to retire?
• What sort of lifestyle do you want to have in retirement?
• How much annual income will you need to sustain that lifestyle?

Once you answer those questions, you can work backward to determine the actual dollar amount you need to save before you retire. Then, you can continue to work backward to determine what percentage of your salary you need to save and what rate of return you will require to get to the big number.

Compare Your Savings Strategy to What Our Other Clients are Saving:

In a 2014 Scottrade^® study, we surveyed 1,952 Scottrade clients to find out how much they’re saving for retirement and how confident they feel with the current state of their savings. Take a look at the results.
 

How Much You Save vs. How You Save

While you may be able to come up with savings guidelines based on the Scottrade^® study results shown above, the truth is that saving for retirement isn’t a one-size-fits-all approach. How much you save may be just as important as how you save.

Read Next: How You Should Save for Retirement

Lisa Noah has been at Scottrade since 1999. She is the branch manager at the Newton Center, Mass. branch.

The material provided in this presentation is for informational purposes only and its use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security, type of security, or pursue a specific strategy. Investors should fully research any security or strategy before making an investment decision.

Scottrade provides self-directed investors with online investing services, and does not make recommendations or offer investment advice of any kind. Survey results are provided for informational use only. Answers to Survey questions were not verified. The user assumes all risks of using the materials provided.