What is the recommended amount to save for a comfortable retirement?

• Experts advised that there isn't a specific amount for retirement savings, and starting with 15% of your annual salary before taxes is a good starting point for many individuals.
• Starting early with small savings is crucial, as those who start later will need to increase their savings rate.
• Ensure that your asset allocation in a tax-advantaged account like a 401(k) plan or an individual retirement account isn't too conservative based on your age.

Many Americans are anxious and confused when it comes to saving for retirement.

What is the recommended amount that households should save to ensure financial stability in their golden years?

A 2024 poll by the Bipartisan Policy Center found that more than half of Americans lack confidence in their ability to retire when they want and sustain a comfortable life.

Retirement savings is a complex and uncertain subject.

Philip Chao, a certified financial planner and founder of Experiential Wealth in Cabin John, Maryland, stated that the question is quite challenging to answer.

"No one's response is the same," Chao stated. "There isn't a specific numerical solution."

Why?

The value of one's nest egg and how long it must last are influenced by factors such as income, when they started saving, when they'll stop working, how long they'll live, and how financial conditions may evolve, which makes it impossible for anyone to predict the exact amount they need to save.

Experts suggest that there are certain guidelines and principles that can increase the chances of successful saving.

15% is 'probably the right place to start'

CFP David Blanchett, head of retirement research at PGIM, advised starting with a total savings rate of 15% as a likely starting point.

The percentage represents the portion of savers' annual income before taxes that includes any money they may receive from a company 401(k) match.

Harvard expert warns that the retirement planning gap is often overlooked, with many Americans falling behind on their retirement savings.

Those with lower incomes, such as those earning less than $50,000 annually, may have difficulty saving as much, possibly around 10%, according to Blanchett.

Those who earn more than $200,000 a year may need to save closer to 20%, according to him.

The disparities in retirement income among different earners are caused by the progressive nature of Social Security. While benefits are a larger proportion of lower earners' retirement income compared to higher earners, those with higher salaries need to save more to make up for the difference.

Chao stated that if she earned $5 million, she wouldn't worry much about Social Security because it wouldn't significantly affect her.

How to think about retirement savings

Chao stated that households should have a fundamental understanding of their saving purposes.

Essential expenses such as food and housing can be covered with savings during retirement, which may last for many years, Chao stated. It is hoped that there will be extra funds available for non-essential spending, like travel.

Households typically require approximately 70% to 75% of their pre-retirement salaries to be replaced from a mix of personal savings and Social Security income, according to Chao.

To maintain their lifestyle in retirement, workers should aim for a replacement rate of 55% to 80%, according to Fidelity, the largest administrator of 401(k) plans.

Fidelity stated in an October analysis that about 45% of the savings would come from the investment.

The firm suggests that individuals should save 15% of their income from the age of 25 to 67, but the rate may be lower for those who have a pension.

Fidelity estimates that someone who starts saving at 35 years old would need to save 23% a year in order to achieve the same savings rate as someone who started saving at an earlier age.

An example of how much to save

Using Fidelity's financial calculus, a 25-year-old woman earning $54,000 a year with a 1.5% annual raise, after inflation, would have a salary of $100,000 by age 67.

To maintain her lifestyle after age 67, her savings would need to generate approximately $45,000 per year, adjusted for inflation, which is 45% of her $100,000 income before retirement, according to Fidelity's recommendation for an adequate personal savings rate.

To achieve a 15% retirement savings rate, the worker must save 10% of her income, starting with $5,400 this year, given that she currently receives a 5% dollar-for-dollar match on her 401(k) plan contributions.

Experts advised that 15% may not be a suitable guide for all individuals.

"Blanchett stated, "The more you earn, the more you need to save." She emphasized the significance of this statement, particularly in light of how Social Security benefits are calculated based on an individual's past earnings."

Keys to success: 'Start early and save often'

There are some keys to general success for retirement, experts said.

1. Saving early and frequently is crucial, according to Chao. This approach aids in developing a savings habit and allows more time for investments to flourish, as experts suggest.
2. ""Start saving money whenever and wherever you can, even if it's just 1%, to develop the habit of putting money away," Blanchett advised."
3. Blanchett advises saving at least a quarter of each raise to avoid lagging behind your more expensive lifestyle.
4. Investors should not be too conservative with their investments, according to Chao. Adequate growth of investments over decades can be ensured by having an appropriate mix of assets such as stocks and bonds, said Blanchett. While target-date funds may not be ideal for everyone, they offer a "good" asset allocation for most savers, Blanchett added.
5. It is better to save for retirement in a tax-advantaged account like a 401(k) plan or an individual retirement account rather than a taxable brokerage account, as the latter will generally erode more savings due to taxes, according to Blanchett.
6. One caution is that workers can't always count on the option of delaying retirement being available.
7. It is important to be aware of the vesting rules for your 401(k) match, as you may not be eligible to receive the matching funds until after a certain period of service has elapsed.