How much should you save for retirement?

One critical factor is any other potential sources of income, in addition to what’s saved and invested in your portfolio, including:

• Your projected Social Security retirement benefit

• Pensions

• Other guaranteed lifetime income, such as income from a bond or an annuity

Another critical factor is your projected outflow: How much you’ll spend each year in retirement. Your calculation can be based on current spending patterns with adjustments for inflation and the natural progression of spending as you age. Keep in mind that medical costs will likely increase as your activity level decreases.

The lifestyle you choose to enjoy in retirement directly affects your required savings. For example, if maintaining the same lifestyle might require 10 times your pre-retirement income by retirement age, a scaled-back, frugal lifestyle can have a lower multiplier of seven or eight. Conversely, a retirement spent fulfilling an expensive bucket list will call for a higher multiplier — perhaps at 12 — to cover the costs and ensure you won’t run out of money.

One cross-check of whether your savings are on target for your chosen lifestyle is to run the calculation described in the 4% Rule we’ll explain further in this article. The rule assumes you’ll be replacing 80% of your pre-retirement income for use in retirement. However, depending on how your projected lifestyle compares to pre-retirement, you might vary your target of replacing 80% of your pre-retirement income downward to 70% or up to 90%.

How much you already have set aside for retirement — whether because you started early, invested well, or made sacrifices to save a higher percentage of income — can affect how that compares with where your savings should be according to the algorithm. If you're ahead of schedule, you can afford to scale back on savings. If you're behind, you can accelerate how fast you save.

The number of years left until you reach your chosen retirement age will affect how much you have to save at each point along the journey. It determines how much time your savings have to grow and how you grow your savings. The farther you are from retirement age, the lower your savings levels can be, as funds can benefit from the compounding impact of time. Time is a powerful ally, as small amounts you invest early can grow far larger than big amounts invested closer to retirement.

For example, if you have 30 years until retirement, you can take more risks in your investments and generate greater returns — or have the time to recover in case of a loss. However, if you're just five years from retiring, your investments should be in far safer assets. Growth may be more limited, but you'll be assured of the funds when you retire.

Saving for retirement is a balancing act: you want to save enough money to ensure a comfortable retirement and to last your lifetime. However, you don't want to save so much of your income that you struggle to cover your current bills and don't enjoy life. The amount of your current income will determine how much you can save while still maintaining that balance.

While some of the factors reflect your personal decisions about retirement — such as when you'll retire and how much you wish to spend each year — others involve unknowns. Unknown factors may include:

• How many years you'll have to save for retirement

• What will happen to the markets

• How inflation rates will behave

When an overwhelming number of factors enter into a calculation, rules of thumb are developed based on extensive analyses that result in general guidelines. In the case of retirement, several have been developed by industry experts based on data and the experience of their clients. By examining various rules of thumb systematically, you can multiply your chances of getting the savings number right. Read on for three of the best-known strategies to save for retirement.

This mathematical calculation makes two assumptions:

• You can live on 80% of your pre-retirement income because you won’t be paying payroll taxes or setting aside 10% to 15% for retirement

• You’ll generate a certain amount each year from guaranteed lifetime income sources such as Social Security, pensions, 403(b) plans, and 457(b) plans

For example, if your pre-retirement annual income is $100,000, you will need $80,000 annually in retirement. Hypothetically, if your guaranteed lifetime income generates $45,000 each year, the shortfall will be $35,000.

Industry experts who apply the 4% Rule suggest that you can estimate how large your investment nest egg has to be if you divide the amount of your annual shortfall by 4%. In this example, a shortfall of $35,000 divided by 4% implies that you’ll need a nest egg of $875,000 when you retire to meet your financial needs. While this strategy makes some assumptions that may have to be refined — such as lifestyle changes, longevity, inflation, and market returns — it can give you a rough idea of your savings target.

Coincidentally, there is another 4% rule on the spending side of the equation. But this time, it’s the 4% Withdrawal Rule developed by Bill Bengen in the mid-1990s using 50 years of historical data on stock and bond returns. The strategy suggests that a projected retirement nest egg will last for 30 years or more if a retiree withdraws no more than 4% of the portfolio’s value in the first year. In subsequent years, the withdrawal equals not a percentage — but the prior year’s withdrawal amount corrected for inflation.

You may wonder what percentage to save for retirement. For example, one theory is that you should save 10 times your pre-retirement income by age 67, and to reach that goal, the general rule of thumb to save is 15% of your annual income.

This comes with several assumptions. First, it assumes you start saving 15% of your annual income in your mid-twenties and follow typical behaviors, such as contributing to an employer-sponsored retirement account with an employer match. It applies age-based asset allocations throughout, with riskier stocks dominating early on and safer bonds closer to retirement. It also assumes you retire at age 67 and live through age 93. Any changes you make to these assumptions will raise or lower the retirement savings percentage.

Other age-related savings targets may require variations in the percentage you save of your income, maybe requiring 20% or 25% in order to reach a specific income multiple at retirement. Whatever the percentage, following the rule should result in a nest egg that provides a large portion of your retirement needs but assumes Social Security benefits and any other guaranteed lifetime income will also supplement it. However, the rule is also subject to the influence of several factors, such as those mentioned above.

This strategy provides savings targets for each age you reach, which is helpful in ensuring you don’t fall too far behind in the process. One model has you saving one time your annual salary by age 30 and progressively more until you have 10 times your annual salary saved by age 67. For example, you should have the following saved by age:

• Age 30: 1x your annual salary

• Age 35: 2x your annual salary

• Age 40: 3x your annual salary

• Age 45: 4x your annual salary

• Age 50: 5x your annual salary

• Age 55: 6x your annual salary

• Age 60: 7x your annual salary

• Age 65: 8x your annual salary

These age-based savings targets serve as helpful milestones, which will give you an idea of if you need to adjust the tempo of your savings. You may have to fine-tune some aspects along your journey to retirement, but you'll know you're not far from being able to maintain the lifestyle you've chosen once you get there. Working with a financial advisor on a regular basis is particularly valuable as you make adjustments along the way.

The “eight times” or "10 times" targets may feel like a challenge until you consider how many years you have to get there. In any case, the benefit of a savings schedule is that it can be adjusted to fit your personal plans. For example, you can choose to delay retirement, in which case your multiplier can be lower because your savings have longer to grow, you'll have fewer years to finance, and your Social Security retirement benefits will be higher. Or you might decide to reduce your lifestyle in retirement, in which case you don't need as much funding each year.

The age-based retirement savings targets recommended by different industry experts can provide a valuable measure of your progress. By comparing your savings against each multiplier in the model you adopt, you'll know if you should course-correct in one of many ways: spend less, save more, work longer, or redesign what retirement looks like.

If your chosen multipliers look intimidating, a decade-by-decade action plan can help you get on track to a successful retirement. To make it even easier, working with a financial advisor through FinanceHQ can help you translate these savings goals into your current financial situation.

Saving for retirement in your 20s may not be a priority. You’re focusing on your career, exploring what life offers, and starting to pay down any student debt. Regardless, you should build an emergency fund with three to six months of living expenses in an FDIC-insured savings account so you can responsibly handle your obligations — including your credit.

For the longer term, enroll in your employer's retirement plan and contribute at least the amount needed to earn the full company match. If no employer plan exists, set up a traditional or Roth IRA by budgeting some of your savings into an individual retirement account (IRA) each year-end. These early years offer an excellent opportunity to save and benefit from the power of compound earnings. You should reach age 30 with at least your current year's salary saved for retirement.

Responsibilities pick up in your 30s in the form of marriage, mortgage, and family. Be sure your emergency fund sits at six months of living expenses to cover those responsibilities. As your salary increases, focus on paying down any debt while continuing to contribute to employer-based or individual retirement accounts. Raise your contribution percentage by 1% each year until you reach 15% or more.

Any extra money can be invested in a brokerage account or, if you have children, in a 529 educational savings account. By age 40, you should have three times your current salary in retirement savings. As your family obligations grow, this becomes an ideal time to consult with a financial advisor who can help with financial complexities such as opening a 529 account for college tuition, assuring that your retirement assets are properly allocated, investing in life insurance, and establishing essential documents such as a will and living trust.

Your 40s can bring change as you mature in your career and personal life. These peak earning years should be focused on minimizing debt and maximizing savings: retirement and others. Protect your retirement savings — and maximum contributions — from any of life's curveballs. Replenish emergency funds as needed and consider if your current source of income is enough for you to keep up with your savings plan.

Meeting with a financial planner at this stage may help you integrate all the financial pressures with a well-defined retirement strategy. Your goal should be to reach age 50 with five times your current salary in retirement savings.

By your 50s, the need to save for retirement becomes more real. Be sure debt is minimal, possibly even paying off your mortgage. By 50, you’ll have access to "catch-up" contributions to retirement accounts, so take advantage of them. Keep emergency funds topped up and shift discontinued educational contributions to retirement and taxable brokerage accounts.

By 55, your savings across all accounts — retirement and investment — should be equal to six times your current income. By 60, the multiplier should be seven. You’re now managing a sizable amount of money which more than justifies speaking to a financial advisor to fine-tune your investment strategy as retirement approaches.

Once you’re in your 60s, you're in the last phase of income-earning. The pressure of imminent retirement should help you save as aggressively as possible. It's time to revisit your retirement savings regarding how assets are allocated, possibly adjusting the risk downward for capital preservation and toward investment strategies that favor lower taxation when funds are withdrawn in retirement. A financial advisor can be helpful here to ensure you have the chosen multiple of your current salary by the age you choose to retire.

Steadily increase your emergency funds to one year of living expenses to cover unexpected medical and other issues that could disrupt this crucial savings period. Consider whether you might enjoy working part-time in retirement as you approach the transition from the accumulation phase to the spending phase.

Ask anyone in retirement what they wish they had known when they were in their 20s, and they'll say, "I wish I had listened when I was told to start saving for retirement." Thinking only of the short term is part of human nature, but anything that can be done to awaken that priority makes the entire journey easier.

Following one of the rules of thumb — whether it’s calculating your nest egg with the Rule of 4%, setting age-based retirement savings targets, or saving a specific percentage of your annual income — can provide valuable guidance in how much you want to save and how to get there.

However your current savings might compare to your target, remember that there are always ways to catch up. The key is to ask for help from professionals who can review your current finances and plot a customized course toward long-term retirement savings success.