Perspectives

To Build a More Secure Retirement, Save with Purpose

A little preplanning can help ensure that you are saving enough for your future

Many people risk heading into retirement without knowing how much money they’ll need to support themselves. You may want to spend a few minutes estimating the amount of income you’ll need and how much you should be saving.

How much will you need?

Financial experts estimate that you’ll need 75% of your pre-retirement income, adjusted annually for inflation, to live comfortably during retirement. Of course, if you’ll be paying a mortgage or have chronic health problems, you may need to replace a higher percentage.

Where will it come from?

Current retirees rely on Social Security, employer pensions, part-time work, and personal savings and investments to meet their income needs after retirement. Here are some considerations:

•  Social Security often provides a fraction of the average retiree’s former salary. Generally, the higher your income before retirement, the less Social Security will replace. In March 2008, the average monthly before-tax benefit for a retired worker was $989.80—or about $11,877.60 a year.1

•   Employer-sponsored defined benefit plans (sometimes called pension plans) promise a specific benefit at retirement. Usually, the amount of the benefit is determined by your years of service and your salary.

•   Be conservative as you estimate the amount of income part-time work will generate. More than one-third of today’s retirees had to stop working before they had planned, often because of circumstances outside of their control.2

•   For many people, personal savings—taxable and tax-deferred accounts such as 401(k) plans—will be the most important source of income after retirement.

How much should you save?

Once you’ve figured out how much income you’ll need during retirement, determine how much you should be saving. As you can see in the table, saving just a little bit more today can provide significantly more income in the future.

Consider Sandra, a hypothetical 35-year-old plan participant. She earns $40,000 annually and has saved $20,000 for retire-ment. If she contributes 4% of her salary to her 401(k) plan during her career, she will have $19,350 in annual income in the first year of retirement. However, if Sandra contributes just a little bit more each month, she will be able to replace more of her preretirement income.

 

Would you like more information?

For more information check with your plan’s website or speak with a plan representative.

Social Security Administration, Master Beneficiary Record, 100 percent data.

2 EBRI Retirement Confidence Survey. April 2009.

This article has been prepared by T. Rowe Price Retirement Plan Services, Inc., for informational purposes only. T. Rowe Price Retirement Plan Services, Inc., its affiliates, and its associates do not provide legal or tax advice. Any tax‑related discussion contained in this article, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this article