How Much Should I Save for Retirement?

A key question I often hear from clients is whether or not they will have enough $ to retire comfortably. This answer is different for each client – there is no “magic number.” So much depends on your lifestyle, health, family needs, where you live, travel plans and more. A general rule of thumb is 75% to 90% of current income in retirement, but this can vary widely.

Some expenses may decrease in retirement, especially expenses related to work (commuting, work attire, payroll taxes, and retirement contributions). But other expenses may rise – travel, health care, or supporting family members. The annual amount and types of expenses can fluctuate as you age. Your retirement savings goal depends on the lifestyle you want, your retirement date, and your income sources. So, how much do you need to save?

1. Consider your retirement lifestyle goals.

Do you plan to travel extensively? Support or spoil your grandchildren? Live in two homes? If so, you will need more funds than someone who plans to live a quieter life gardening, golfing, fishing, and playing bridge and pickleball. Choosing to downsize your home and/ or relocate to a less expensive area means you may need to save less for your retirement years.

2. Consider when you want to retire.

If you retire early, you will need a larger nest egg, so start saving earlier and more aggressively. You will require income for a longer period, and have fewer working years to save and invest before retiring, One of the best strategies is to start saving for retirement as early as possible (in your 20’s and 30’s), and to encourage your children to do the same. Savers benefit from compound interest as retirement funds grow exponentially over time. Even small amounts can have a big impact over several decades of growth.

If you plan to work well into your 60’s or even beyond age 70, you have more time to save and will need few years of income in retirement. And if you are behind on retirement savings, it is never too late to start. Save the maximum allowed by IRS guidelines every year. Take advantage of all retirement savings plans available to you whether through your employer or as self-employed. ff you are aged 50 or older, make additional contributions to your IRA or employer retirement plan through catch-up provisions. Contribute an extra $1,000 to an IRA (a total of $8,000); and an extra $7,500 above the $23,500 contribution limit for 401(k) and 403(b) plans (a total of $31,000) for the 2025 tax year.

3. Estimate your sources of retirement income.

Consider your Social Security benefits, pension income, and other revenue such as investment income, rental property income, annuities, royalties and part-time work. Understanding how and when to claim Social Security benefits can significantly influence your retirement date and lifestyle. Benefits depend on when you start collecting (between ages 62 to 70); your highest average 35 years of earnings, and other factors. Social Security is not, and has never been intended to be, any person’s entire retirement solution. The program replaces only about 40% of an average worker's pre-retirement income. Most retirees will still need additional income sources to maintain their standard of living.

4. Estimate your retirement expenses.

While some costs may go down in retirement, other expenses may rise. Annual inflation will increase your living expenses over time. Health care can be a significant expense, especially if you need long-term care support. Paying off debt (student loans, medical debt, credit card balances and mortgage debt) before retirement can help cash flow during retirement. But this can be challenging since many have been paying for college while trying to maximize retirement savings in their 40’s to 60’s.

Most people become eligible for Medicare at age 65, regardless of their Social Security Full Retirement Age (FRA). If you plan to retire before 65, plan for alternative health care coverage to bridge the gap until Medicare eligibility starts. Options include:

· Continue coverage through your employer's retiree health benefits.

· Apply for COBRA from your previous employer (typically available for up to 18 months).

· Obtain coverage through a spouse's health insurance plan. · Find individual health insurance through the Health Insurance Marketplace.

· Seek part-time work that offers health care benefits.

5. Calculate your savings gap.

Determine how much you need to save to support your lifestyle, and recognize that many people now live 30 years or more in retirement. This can create a shortfall that must be covered with personal savings and income. This savings gap will inform your retirement timeline and savings strategy. If you have a significant shortfall, you need to review where you can reduce discretionary spending and find additional sources of income – before and during retirement.

You can use an online retirement calculator to get a rough idea of your financial readiness for retirement. But to get a more precise figure for how much savings you will need to retire comfortably, and to understand how your cash flow will change, hire a financial advisor who can provide personalized guidance based on your specific situation. If you are not currently working with FPS, we would be happy to talk with you. Questions? We are here to help.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.