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Start with the end in mind. For most working people, Social Security will provide between 30% and 40% of their final salary if they retire at the age in which they can receive full benefits (age 65-67 depending on year of birth). For most of us, the remaining funds required to meet living expenses need to come from personal retirement savings.

You probably will not need to replace 100% of your final salary when you retire because there are at least two expenses you may no longer have.

  • FICA taxes of 7.65% (or SECA taxes of 15.3% if you are a clergy person)
  • Any amount you are saving for retirement (hopefully by this time between 12% and 15% of your salary)

Adding these two numbers together shows you may be able to reduce your income needs by 20%. In other words, you may be able to maintain your lifestyle with about 80% of your final salary. Your personal circumstances and lifestyle choices will ultimately determine your exact income needs in retirement.

In order to support this level of income in retirement, you will need to save an amount equal to 12-15 times your final salary by the time you retire, assuming a retirement age of 65. For example, if your final salary is $50,000, you should have saved between $600,000 and $750,000.

How are you doing? This table gives an easy benchmark for various ages to illustrate where you should be if your goal is to reach 12 times salary at age 65. To calculate your own progress, follow this simple math:

Age Retirement Savings to Income Ratio (Multiple of your annual income you should have saved)
25 0.1
30 0.6
35 1.4
40 2.4
45 3.7
50 5.2
55 7.1
60 9.4
65 12.0

Add savings in IRA, 401(k) and 403(b) accounts
_______________________________________     =   Your Savings to Income Ratio
                     Your current salary

If you are married, make sure to include savings and income for you and your spouse. If you are close to retirement and know that you will need significantly less than your salary to live on, substitute that amount for your actual salary.

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