How Much Should You Save for Retirement? Here's Where to Start

When our parents and grandparents started working, it was more common for people to retire with a generous company pension bolstered by Social Security payments. In 1970, 45% of U.S. non-government workers had a traditional employer-funded pension plan. Now, that’s down to just 15%.

These days, preparing for retirement is more of a do-it-yourself proposition. Yes, there’s still Social Security, at least for now. But the average Social Security benefit as of January 2022 was just $19,370 a year.

How much to save?

There’s no one right answer to that question. It depends on how much you make, what future costs are on your horizon, like buying a house, and how soon you want to retire.

A saving target that pops up often among financial consultants is 15% of pre-tax (gross) income. Some advise saving 10% to 15% if you start in your 20s, 15%-20% if you wait until your 30s, and so on. Starting as soon as you can is vital.

Don’t overreach; you want a figure you can stick with over time, even if it’s less than 15%. One strategy is to start small and increase your contribution each time you get a raise.

Set a retirement goal

The figure $1 million comes up frequently when financial advisors talk about how much you should have socked away when you retire. Of course, that’s wildly unrealistic for some and maybe not enough for others. But it’s a starting point for thinking about retirement saving. And it might not be as unreachable as you think.

Let’s say you’re age 25 and you want to have $1 million for retirement by age 65. At a 10% annual rate of return (the average gain for the S&P 500 stock index for the last several decades), you would need to invest $179 a month, moneyunder30.com estimates.

Where to put your money?

A workplace 401(k) plan is the best retirement savings option for many people—if your employer offers it. Contributions out of your pay are tax-deferred, meaning you don’t get taxed on your money until you withdraw it at retirement, when you may have a lower tax rate.

With a 401(k) plan, most employers offer a matching contribution corresponding to some or all of what you pay into your plan, up to a certain percentage of your salary. Ideally, you’ll want to contribute at least that percentage, so you don’t leave free money from the boss on the table. (Check your plan’s rules. Some make you work for a company for a few years before you’re fully “vested” in matching funds.)

What, no 401(k)?

If your workplace doesn’t offer a 401(k), you can open an individual retirement account, or IRA, on your own. Contributions to a “traditional” IRA also are tax-deferred, with some limitations. Contributions to a similar kind of plan called a Roth IRA are not tax-deferred, but you can withdraw that money tax-free when you retire.

Usually, your employer picks a financial firm to administer a 401(k), but you can shop around for an IRA provider on your own. Understand the rules before opening an account. Generally, you’ll pay a penalty if you withdraw money before age 59-1/2.

How to invest your money

Retirement plans like these typically offer you a host of investing options with various risk levels: stocks, bonds, mutual funds, index funds, exchange-traded funds, and more. The companies that administer retirement accounts typically offer online tools that let you track investment performance.

Some plans offer “target-date funds” crafted for people who plan to retire in a given year. They may be an option for people who don’t want to do a lot of investment research themselves.

The average annual return for people with money in 401(k) investment plans was 9.36% for the five years ending March 31, 2022, according to Mid Atlantic Trust Company.