It's never too early to start planning for retirement, but calculating how much money you'll need for retirement is a personal process. It will depend on your current and future assets, your projected expenses, and the kind of lifestyle you hope to lead once you reach retirement age. It will also depend on one variable you might not like to think about -- how long you expect to live. Even though there's no one right answer, experts have guidelines you should consider when planning how much you need to set aside for your Golden Years.
In general, personal finance experts say you should assume your annual retirement income will be about 80 percent of current gross household income. Even though the average American life expectancy is 78 years, you should plan your retirement as if you were going to live until you are at least 90, so you don't run out of money if you live longer than average. In order to achieve this goal, you should be saving 15 percent of your take-home pay every year, and investing it in some kind of portfolio that allows compounding interest.
Fidelity Investments suggests that you should have twice your annual salary saved for retirement by the time you are 40. You should have three times your annual salary saved by the time you're 45, and four times by the time you're 50. If you keep this level of savings up, you should have about eight times your annual salary saved by the time you're 65 and ready to retire.
Even if you manage to save 15 percent of your take-home pay every year, it may still not be enough to maintain the lifestyle you want in retirement. If you make trade-offs, you'll need less money. You could delay your retirement, move to a less-expensive home, or even work part-time even though you've "retired" from your career.
The Hard Truth
Many Americans think they're ready for retirement, but don't have nearly enough saved to live comfortably. Fidelity -- the largest administrator of 401(k) plans in the country -- says that the average retirement account has around $72,800 in it. The low savings rate is why a 2008 study by the National Bureau of Economic Research said that more than 46 percent of Americans die with less than $10,000 in assets.
Daniel Hess has been writing professionally for more than 15 years. His work has appeared in newspapers, magazines, on television and on the radio. Hess has a master's degree in nonfiction writing.