How Much Do You Need to Save to Retire?

Time Frame

One of the first decisions, or guesses, you need to make in planning to save for retirement is how many years you have left before you retire. Keep in mind that some people choose to keep working after 65, and others find themselves without a job sooner than expected. In any case, the earlier you start to save for retirement, the better off you'll be. When you get an early start, your investments have more time to grow, you have the option of choosing investments with higher risks and higher potential returns, and you can benefit from compound interest. If you're getting a late start, you'll need to save more each year in order to catch up, and invest wisely. Some retirement accounts, such as IRAs, have higher contribution limits for people who are closer to retirement.

Consider what your expenses will be during retirement. Although many people expect to spend less, since they may have fewer debts and no children to support, others find that increasing health care and fuel costs, family members to support, or hobbies such as traveling make them spend just as much (or more) than when they were working. You also need to consider the rate of inflation, or increased costs for goods and services. The inflation rate for some areas, such as medicine and gasoline, may continue to be higher than the general inflation rate.

In addition to expenses, you'll need to figure out what types of income you'll be receiving during retirement. This could include company-sponsored pensions, as well as 401Ks, IRAs, general savings or real estate income, in addition to Social Security and government-sponsored plans. Some people choose to leave Social Security out of their retirement calculations, especially if they won't be retiring for many years, because of uncertainty over its long-term funding.

The amount of money you need to save for retirement also depends on the types of investments you have, and their rate of return. Some investments, such as savings accounts and bonds, may barely keep up with inflation, but provide a guaranteed or safer return. Stocks may provide a higher rate of return in the long-term, but they are subject to significant fluctuations, and may lose value. Many investors choose higher rate, higher risk investments while they are young, and switch to safer investment as retirement nears. Many people also like to choose investments that allow them to live off the interest for as long as possible, without using up the principle.

Many websites offer calculators or online planning tools for estimating how much you should save. If you already have a retirement account through a financial firm, you may want to use its website for your calculations, since it may have customizable tools. You may also want to seek a qualified financial advisor to evaluate your particular financial situation, and help determine how much you need for retirement. Keep in mind that all of these methods only provide estimates to help you plan, and you may actually need more or less. If you cannot meet your retirement goals, start saving and investing what you can.