The rate of retirement savings is inching upward. "Nearly a third of companies that use automatic 401(k) enrollment now start workers saving at 6% of their salaries or higher," said The Wall Street Journal, citing a report by Vanguard Group, which is "about double the share of organizations that did so a decade ago."
Previously, said the Journal, setting a default contribution rate of 6% was "considered too onerous for younger workers and too paternalistic by those who favor leaving decisions to individuals." But now, companies are seeing this as a nudge in the right direction for employees saving for retirement — and taking advantage of employer matching contributions. These shifts raise the question: How much do you really need to save for retirement?
How can you figure out how much you actually need to retire?
There are a number of ways you can figure out how much you'll actually need to save up to retire. Here are a few guidelines you can use to make the calculation:
The 4% rule: "One easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the 4% rule," said Investopedia. So, "for an income of $80,000, you would need a retirement nest egg of about $2 million ($80,000 /0.04), assuming "a 5% return on investments, after taxes and inflation, no additional retirement income, such as Social Security, and a lifestyle similar to the one you would be living at the time you retire." This rule also "assumes that you will live for 30 years in retirement," which you may need to adjust depending on your health or other circumstances.
80% of your pre-retirement income: The 80% rule is based on the recommendation from many experts to plan on "living on 80% of your pre-retirement annual income," said Investopedia. So, for instance, "if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce." You can then make adjustments as needed based on personal factors like your lifestyle and health, as well as any additional sources of income.
10 times your annual salary by age 67: If 80% sounds too steep, try this rule instead — "the financial-services firm Fidelity suggests that savers can target a much lower income replacement percentage than 80%," and that "to maintain a lifestyle similar to the decade before retirement, a 45% income replacement target is sufficient," said the Journal. With this rule, you'd aim to have saved up a certain multiple of your salary by a specific age, ideally reaching 10 times your annual salary in total retirement savings by age 67.