The 70% rule for retirement savings can help you estimate the amount of income you may need in retirement. It says you'll need 70% of your pre-retirement, post-tax income to retire comfortably. Here's what to know about the 70% retirement savings rule.
The 70% Rule for Retirement Explained
The 70% rule for retirement savings says that you can estimate your future retirement spending by multiplying your post-tax income by 70%. For example, if your income is currently $72,000 per year after taxes, your future annual retirement spending would be around $50,400, or $4,200 per month.
Actual retirement spending varies for each person. Depending on how much debt you're carrying, whether your home will be paid off and your lifestyle choices when you retire, this percentage may be high or low. It is, however, a starting point to help you determine if your retirement savings are on track. Rather than 70% as a hard and fast rule, it can be beneficial to use it as a starting point.
How to Calculate What You Should Have Saved
To gauge whether you're on track to have enough saved for retirement, Fidelity suggests using your age and your income. At each age milestone, you should have a certain amount saved if you're planning to retire by age 67. Fidelity's age-based retirement savings factor assumes 45% of your income will come from retirement savings with the remainder supplemented with Social Security.
- Age 30: Have the equivalent of your annual salary saved. If your salary is currently $45,000, you should have $45,000 saved.
- Age 35: Have the equivalent of two times your annual salary saved. If your salary is $60,000, you should have $120,000 saved.
- Age 40: Have three times your salary saved.
- Age 45: Have four times your salary saved.
- Age 50: Have six times your salary saved.
- Age 55: Have seven times your salary saved.
- Age 60: Have eight times your salary saved.
- Age 67: Have 10 times your salary saved.
Let's say you're a 40-year-old advertising sales agent making the median salary of $73,260 (according to the Bureau of Labor Statistics). By now, you should have three times your salary set aside for retirement, or $219,780. You're consistently a top performer and are promoted to sales manager by age 50, with a salary of $150,530. Your retirement savings should be six times your salary, or $903,180.
Keep in mind, these milestones are targets. You may not consistently reach each milestone depending on how your lifestyle and cost of living changes. Even so, having a goal post can help you stay on track.
Why 70%?
You may wonder why 70% of your post-tax income is the rule rather than 100% of your salary or some other number. A few factors play a role. You won't need as much income in retirement because you'll get to keep more of your income than you do now.
- You won't have Social Security and Medicare taxes withheld from your retirement withdrawals. That counts for 7.65% of your income—or 15.3% if you're self-employed.
- You'll pay less income taxes after retirement since your income will be lower.
- If you don't need to save more for retirement once you're retired, you'll have fewer deductions from your monthly income.
Another reason you may only need 70% of your post-tax income: Your spending will likely decrease after retirement. You may find that you spend less on housing, debt payments and transportation.
Tips for Saving More for Retirement
If you want to ramp up your retirement savings to catch up or simply to have more, there are some ways to save more.
Increase Your Contributions
Find out what the contribution limits are on the retirement accounts you hold, and raise your regular contribution amount if you can afford it. As often as you can, put extra money toward retirement. For example, cash gifts and bonuses are a great opportunity to boost your savings. Automating your contributions can help you stay consistent with less effort.
Take Advantage of Your Employer's 401(k) Match
If your employer offers a 401(k) match on your retirement plan contributions, make sure to contribute at least enough to get the maximum match. It's essentially free money toward your retirement.
Find out how long you need to stay with the company to be vested—meaning, the money is yours to keep. Leaving the company before you become fully vested could forfeit all or some of your matched contributions.
Open an IRA
An individual retirement account (IRA) allows you to make up to $6,500 of tax-free or tax-deferred contributions to your retirement, and an additional $1,000 if you're 50 or older. The account is separate from your 401(k), so you can add to both.
There are two main types of IRAs:
- A traditional IRA allows you to make tax-deferred contributions, meaning you won't pay taxes until you make withdrawals in retirement.
- A Roth IRA allows post-tax contributions and tax-free withdrawals after five years. However, your Roth IRA contributions limits may be lower depending on your income and filing status.
Make Catch-Up Contributions
If you're 50 or older, you can make additional catch-up contributions to your retirement savings. The maximum catch-up contribution varies by retirement plan and year. For 2023, the catch-up limits are:
- 401(k): $7,500
- IRA: $1,000
- Roth IRA: $1,000
- SIMPLE IRA: $3,500
Don't Withdraw Money From Your Retirement Savings
Withdrawing money from your retirement savings can hurt your progress. First, you'll miss out on potential interest earnings. In addition, withdrawals incur a 10% penalty and taxes if they're made from a traditional IRA before you reach age 59½ or from a 401(k) before age 65. You can avoid the penalty if your withdrawal qualifies as an exception, but income taxes still apply.
The Bottom Line
Knowing exactly how much you'll spend during retirement is difficult. Using a benchmark like the 70% rule is beneficial for setting a retirement savings goal. Don't get discouraged if you feel you're behind. As you maintain your regular contributions, look for opportunities to save more. Staying consistent over time can help you build a sizable nest egg.