Okay, so you know you’re supposed to be saving for retirement. Maybe you’ve got your 401k or 403b. Maybe you’ve even gone so far as to open a Roth IRA (yay you!). But how do you know if you’re saving enough?

This is a great question and I’m here to give you all the answers. Except that there aren’t answers. In fact, nobody knows how to know if you’re saving enough. If you’re one of those people who has obsessively Googled “retirement calculators” and tried out every one of them, you know they all give you different answers. 

Whaaaaat?!?! How can that be? 

It makes sense when you think about it. Do any of us know what will happen in our retirement years? I don’t even know what’s for dinner tonight and I’m the one in charge of it. 

The problem with planning for retirement is that there are, like, hundreds of unknown factors. It’s not like planning dinner when you know you need some protein, some vegetables, and maybe some bread or rice or whatever carbs you love. With retirement, you can’t just say “okay, I need a two-bedroom condo with shuffleboard and a side of three trips per year. 

Instead, you have to plan for unknowns, like how long you’ll live, what activities you want to do, how healthy you’ll be, how long you’ll live, whether you’ll be able to walk up the stairs in your home… That doesn’t even include larger societal and economic factors like inflation, tax rates, and stock market downturns or upswings. 

Planning for retirement might seem like it should be based on numbers (how much we need to save each year to get the amount needed to live on), but the reality is that life is messy and numbers don’t reflect the ever-changing, highly personal nature of life. 

So where do you even start?

Despite all of these unknowns, you have to start somewhere. You can’t just stash your extra quarters in a shoebox in the closet and call it a day. Nor can you just throw your hands up and use all of your extra money to buy a giant pontoon boat because you might as well just have fun now if you don’t know how to plan for your future. 

As a result of the many factors affecting retirement, financial professionals developed a number of metrics to help you know if you’re saving enough.

Four ways you can evaluate if you’re saving enough for retirement: 

1. The Percent of Income Method

2. The Savings by Age Method 

3. The Needs Analysis Method

4. The “I’m Doing My Best with What I Have” Method 

The Percent of Income Method

Looking at the percent of your income you save for retirement is one of the most common metrics because it is clear and easy to calculate. Most financial experts recommend saving around 10-15% of your income every year in a tax-advantaged retirement account (401k, Roth IRA, etc). 

This advice works really well if you start saving that amount when you get your first job when you’re in your early 20s and continue until you retire in your late 60s. 

However, if you want to retire early, got a late start, or have other circumstances, the amount you save will need to be adjusted. 

The later you start, the more you’ll have to save. For example, Fidelity recommends saving 18% if you’re starting at age 30 and 23% if you’re starting at age 35. If you want to retire earlier than the full retirement age of 67, you’ll need to do more. On the other hand, working longer or having a pension to supplement your savings can reduce the amount. 

If these amounts seem impossible, start with saving as much as you can and gradually increase the amount every year. If you get a raise, bonus, or tax refund, put it all toward retirement. And remember that these percentages can include any employer contributions you receive. 

Looking at the percent of your income you save is a great start, especially if you’re younger, but it isn’t a complete picture and should just be one of the metrics you’re using to plan for your future. 

The Retirement Savings by Age Method

Another quick and easy way of determining if you’re on track with your retirement savings is to look at the total amount you have saved (or should have saved) at each age. Fidelity recommends having 1x your salary by age 30, all the way up to 10x your salary at age 67. 

Again, this depends on a number of factors including when you plan to retire and your retirement lifestyle. It should be obvious that retiring early will increase the amount you need to save, while working a few extra years would give a significant boost to your savings. 

Both the “savings by age” and “percent of income” methods depend on certain assumptions. Generally, personal finance experts assume that people will earn around 8-10% on their investments, will retire at 67, and that their living expenses will be roughly 80% of what they were pre-retirement. They also assume that you’ll have social security to supplement your savings and that you’ll live a certain number of years. 

But what if that doesn’t describe you? What if you expect to live to 100 or have significant health problems? What if you expect to travel a lot or need long-term care? What if you have a pension that will pay for some of your expenses? 

All of these factors can make the first two methods poor metrics for determining how much you’ll need in retirement. That’s why many financial planners will do a more thorough needs analysis and then work backward. 

The Needs Analysis Method

Many financial professionals say that people generally need to replace about 70-80% of what they were earning pre-retirement. That’s in part because you don’t need to save for retirement once you’re already retired. So if you were making and living on $100,000 before retirement and saving $15,000 of that (15%), it makes sense that you would stop saving that 15% for retirement and only need 85% to live on. In addition, many people find that their expenses are lower in retirement due to reduced transportation costs, not having a mortgage, downsizing, and less need for employment-related costs such as professional clothing, travel, etc. 

This may or may not be true for you, which is why it is sometimes helpful to list out the costs you think you might actually have. To do so, make a simple budget for anticipated retirement expenses. A worksheet like this one from TIAA can help you make sure you’re not forgetting anything. Don’t forget Medicare expenses, insurance, and any debt payments you might have. 

Once you have your number, either by taking 80% of your pre-retirement expenses or by doing a needs analysis, you’re going to work backward to figure out how much money you’ll need. 

The 25x and 4% Rules

A simple way to do this is to use 25x rule, which says that you take your desired/needed income amount (from your needs analysis) and multiply it by 25 to get the amount you should have in your retirement account on the date you retire. So let’s say that you determined you need $80,000 per year to pay for your retirement lifestyle. Multiply that by 25 to get $2 million. So, you’d want to have $2 million in your retirement account when you retire. 

This calculation is based on another rule: the 4% rule, which says that you can safely withdraw an amount equal to 4% of your retirement account (plus an amount increased by the inflation rate) each year. If you do this, your retirement savings should last 30 years. 

Of course, this all depends on more assumptions. Your investments have to earn a certain amount and no year can have unexpectedly high inflation or low returns. And if you live longer or have unexpectedly high medical expenses, it throws off the entire calculation. The good news is that the 25x rule doesn’t factor in social security or any other income you have. 

Retirement Calculators

Another way to calculate retirement needs is by using one of the many online retirement calculators. You will still begin with the same needs analysis as above, but these calculators offer you more ways to add in other income, change the number of years, adjust your retirement age, rate of return, and more. 

Calculators, such as this one from NerdWallet, allow you to play around with the numbers to see how changing the circumstances affect your retirement savings. For example, you can see what happens if you save more, retire earlier, or reduce expenses further. 

Although the calculators are still based on many of the same guesses and assumptions we’ve already discussed, they are one of the best ways to really get a sense of whether or not you’re on track. If you’re not on track, you can see how much more you’ll need and potentially be able to figure out how to make it happen. 

Financial Planners

You might be wondering at what point you’ll need a financial planner. The answer to that is really up to you. A financial planner can certainly be helpful when there are more complicated circumstances. They can help you make sure that your investment mix is appropriate for your goals and give you a more detailed analysis. 

On the other hand, many people have fairly simple and straightforward finances and might feel comfortable figuring out much of this on their own. 

Additionally, you need to be careful not to hire a financial planner who is really a salesperson in disguise. Look for a financial planner who commits to acting as a fiduciary at all times. Fiduciaries are people who are required to act in your best interest. Unfortunately, there are some loopholes that allow people to act as fiduciaries only some of the time, so it’s important to understand how your advisor will be compensated. Think twice before buying a complicated financial product such as whole life insurance or annuities from professionals who receive compensation from the sale. 

The “I’m Doing My Best” Method

Much of financial planning is designed for people who have more than enough resources to pay their bills and live their lives however they want. The reality is that most people just don’t live in that world. 

In one of my first financial planning meetings, the planner asked me if I thought that Social Security would still be around when I retire. I remember wondering why that even mattered. First of all, it’s beyond my control and I can’t see the future. Secondly, what happens if I think that it won’t be around? Am I magically going to have more money to set aside for retirement? 

The fact of the matter is that many people only have so much money and you’re lucky to be able to save anything. I’m not going to pull a Dave Ramsey and shame people for not being able to save more when they’re struggling to put food on the table and pay the ridiculously high cost of health insurance. 

In addition to the difficulty of knowing the future, we face many obstacles to being able to save whatever “enough” is in our current lives. Many of us experienced economic downturns at the wrong time of life, setting back our earning potential. Systemic barriers make it harder and more expensive for People of Color to buy and own homes. Wage inequalities make it harder for women and POC to earn enough. And one big medical catastrophe can suck up all your money in a moment. 

So for all of you who read the rest of this and feel massively discouraged, take heart. Do your best. Start with what you can do and work to gradually increase it. Don’t give up because you only have $25 a month to save for retirement right now. That $25 may not produce enough to live on in retirement, but it will help and it will build up. Start with what you can do now and call it a win. 

Want to take control of your finances but have no idea where to start? I teach money management basics in my Money Confidence Course. Click the button to learn more!

What to Remember about Retirement Savings Calculations

In the end, retirement calculations are based on a lot of guesses and assumptions that may or may not turn out to be true, but they can still be helpful in evaluating if you are generally on track. It’s a good idea to run these numbers periodically (not more than once per year) so that you can adjust your strategy as life evolves. With some planning and a little luck, your chief worry in retirement will be how many puzzles you can complete.