Four guidelines for retirement savings
Learn more about the four key retirement metrics and how they work together to help you meet your retirement goals.
Key takeaways
- Plan for your retirement savings to generate more than a third (and maybe even up to or more than a half) of your pre-tax, pre-retirement, income, with the rest coming from state or government programs.
- Aim to save more than 7x your salary by state pension age.
- Aim to save more than 10% of your pre-tax income each year for retirement.
- As a rule of thumb, aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, then adjust that amount every year for inflation.
- The figures above may vary based on a variety of factors, including your retirement age, anticipated lifestyle in retirement, current income, current level of retirement savings, and future returns.
- Learn more about our four key retirement metrics—a yearly savings rate, a savings factor, an income replacement rate, and a potentially sustainable withdrawal rate—and how they work together.
What will my savings cover in retirement?
For most people in most countries, social security will provide an income base in retirement with the rest coming from savings. But how much should you assume will come from savings? As a rule of thumb, save enough to replace at least a third of your pre-retirement income (and in some countries up to or even more than half), after accounting for your social security benefits.
How much you earn matters
Your salary plays a big role in determining what percentage of your income you will need to replace in retirement. People with higher incomes tend to spend a small portion of their income during their working years, and that means a lower income replacement goal in percentage terms to maintain their lifestyle in retirement.
When you retire matters
The age at which you stop working is another big factor in how much of your pre-retirement income you will need your savings to replace in retirement. The earlier you retire, the more savings you’ll need to have to cover your income during a (longer) retirement.
Planning for retirement income
Once you know where you are going, it becomes a lot easier to make a plan to get there, and to measure your progress along the way. When it comes to saving for retirement, set a course for maintaining your current lifestyle in retirement, and review progress against your goals regularly.
Just remember that the amount of pre-retirement income you will need to replace from personal savings will depend on a variety of factors, including your retirement age and anticipated retirement lifestyle. As always, it can make sense to work through your plan with a financial advisor.
How much do I need to retire?
How much do you need to save for retirement? It's one of the most common questions people have. And no wonder. There are so many factors: When will you retire? How much will you spend in retirement? And for how long?
That's why we did extensive analysis to come up with retirement savings factors that can help you plan—in spite of those uncertainties. These milestones are aspirational. You likely won't meet all of them. But they can serve as goalposts to help you make a plan to save enough to maintain your lifestyle in retirement.
You may need to save more than 7 times your pre-retirement income by state pension age, together with other steps, to help ensure that you have enough income to maintain your current lifestyle in retirement. That goal may seem ambitious. But you have many years to get there. To help you stay on track, we suggest that you set age-based milestones at 10 year increments. For example, if you are aiming to save 12x your salary by a retirement age of 60, you could aim to save at least 1x your income by age 30, 4x by 40, 8x by 50, and 12x by 60. Your personal savings goal may be different based on various factors including the two key ones described below. But these rules of thumb can provide a starting point to help your build your savings plan and assess your progress.
1. When you plan to retire
The age you plan to retire can have a big impact on the amount you need to save, and your milestones along the way. The longer you can postpone retirement, the lower your savings factor can be. That's because delaying gives your savings a longer time to grow, and you'll have fewer years in retirement.
Of course, you can't always choose when you retire—health and job availability may be out of your control. But one thing is clear: Working longer will make it easier to reach your savings goals.
2. How you want to live in retirement
In other words, do you expect your expenses to go down when you retire? Or will you spend as much as you do, or more than you do now?
Take stock
Consider when you plan to retire and what kind of lifestyle you want to live in retirement—on how much you need to have saved when you do retire, and track to the targets before then.
What if you're behind? No matter what your age, focus on the goals ahead. Don't be discouraged if you aren't at your nearest milestone/target—there are ways to catch up to future ones through planning and saving. The key is to take action, and the earlier the better.
How much should I save for retirement?
You may need to save more than 10% of your pre-tax income each year. The more you save each year, together with other steps, should increase the likelihood that you will have enough income to maintain your current lifestyle in retirement. Is 10% 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 that pays you regular amounts, should also be considered.
Now that you know a savings rate to target, here are some steps to think about that can 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 savings to grow.
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. 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
If you plan to retire early, you may need to save more. If you plan to take late retirement, all things being equal, your required saving rate could be lower.
Make savings a priority
Keep your eye on your dreams. Do the best you can to maximise your savings rate to at least 10%. Of course, it may not be possible to hit your savings target every year. You may have more pressing financial demands—children, parents, a leaky roof, a broken car, or other needs. But try not to forget about your future—make your retirement a priority too.
How can I make my retirement savings last?
After decades of saving, it's time to start spending once you enter retirement. But how much can you safely withdraw each year without needing to worry about running out of money? The answer is critical, as retirement can last 20 years or more these days, so you need a strategy that's built for the long haul.
A sustainable withdrawal rate
Aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, and then adjust the amount every year for inflation. Of course, your situation could be different. For example, you might want to withdraw more in the early years of retirement when you plan to travel extensively, and less in the later years. But this 4%-to-5% rule of thumb offers a handy guideline for planning.
Take your timeline into account
One of the biggest factors that affects how much you can withdraw is how many years of retirement you plan to fund from your retirement savings.
The longer you work, or if you have health issues that compromise your life expectancy, you may want to plan on a shorter retirement period; that would result in a higher sustainable withdrawal rate. Conversely, the shorter you work, or if you have a family history of longevity; that would result in a lower sustainable withdrawal rate.
The bottom line
For many people, planning for withdrawals in retirement can be challenging. And no wonder, given the range of uncertainties, from how long you will live, to market performance, inflation, taxes, and more. Our general guidance provides a starting point, but every individual needs to consider these uncertainties, and their personal situation, when evaluating how much they can sustainably spend in retirement.
Tips:
- Estimate how long you think you will live based on your health and family history. You may want to be conservative, since many people underestimate their lifespan.
- Evaluate how much risk you can live with.
- Choose an appropriate mix of savings vehicles.
- Make sure your money is likely to last, by choosing a withdrawal rate you believe has a good chance of success.
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