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WalletPrep worksheet · Investing

How much should you save for retirement?

Name ____________________ Date __________

Key ideas

  1. Plan on 70% to 80% of your pay. The Department of Labor says many people need 70% to 80% of their pre-retirement income to keep their standard of living.
  2. Your savings fill the Social Security gap. Subtract your Social Security estimate from the income you want. Savings cover what is left. For Jordan, that is $23,000 a year.
  3. Multiply the yearly gap by 25. That is the 4% rule turned around. A $23,000 gap needs about $575,000 saved, in today's dollars.

Vocabulary

401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
IRA
Individual retirement account: a tax-advantaged retirement account you open yourself at a bank or brokerage, separate from your job.
Employer match
Money your employer adds to your retirement plan when you contribute, up to a set percentage of your pay.
Savings rate
The share of your income you save instead of spend, written as a percent.
Gross income
Your total pay before any taxes or deductions are taken out. Salary offers and loan applications usually ask for this number.
Inflation
The rise in prices over time, which means each dollar buys a little less each year.

Work it out

Jordan is 30, earns $60,000 and plans to retire at 67. She wants 75% of her pay, $45,000 a year. Her Social Security estimate is $22,000 a year.

  1. Income goal (75%)
  2. Social Security estimate
  3. Yearly gap
  4. Gap × 25
  5. Savings target
  6. Monthly, starting at 30
  7. Monthly, starting at 40

Check yourself

  1. You want $40,000 a year in retirement and Social Security will pay $18,000. What savings target does the gap × 25 method give?

    • A. $450,000
    • B. $550,000
    • C. $1,000,000
    • D. $720,000

  2. You contribute 5% of pay and your employer matches 4%. What is your total savings rate?

    • A. 5%
    • B. 4%
    • C. 9%
    • D. 20%

  3. What share of pre-retirement income does the Department of Labor say many people need?

    • A. 70% to 80%
    • B. 30% to 40%
    • C. 100% to 120%
    • D. 50% exactly

Your turn

Create or log in to your my Social Security account and write down your estimated benefit at 67. Then subtract it from 75% of your yearly pay and multiply by 25. That is your first retirement number.

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Answer key

How much should you save for retirement?

Work it out

  1. Income goal (75%)$45,000
  2. Social Security estimate− $22,000
  3. Yearly gap= $23,000
  4. Gap × 25$575,000
  5. Savings target= $575,000
  6. Monthly, starting at 30$449
  7. Monthly, starting at 40$842
  1. Her income goal is $60,000 × 75% = $45,000. Social Security covers $22,000, so savings must cover $45,000 − $22,000 = $23,000 a year.
  2. Her target is $23,000 × 25 = $575,000 in today's dollars.
  3. Over 37 years at an assumed 5% after inflation, she needs about $449 a month. That is $5,388 a year, or about 9% of her pay, counting any match.

Check yourself

  1. B. $550,000 The gap is $40,000 − $18,000 = $22,000. Then $22,000 × 25 = $550,000.
  2. C. 9% Your savings rate counts both your money and the match: 5% + 4% = 9%.
  3. A. 70% to 80% The DOL estimates 70% to 80% of pre-retirement income to keep your standard of living. Some costs fall in retirement and others rise.