Question

How should young adults save toward your retirement? How do young adults know they are on track? Additionally, what are the averages on how much should be saved by age?  

Answer 1

For young adults just entering the workforce, it’s important to start thinking about saving for retirement early. Maria Bruno, a senior analyst at Vanguard, suggests that even if what you are setting aside is a small amount, it matters in the long run because of compound returns. Starting early and making sure that you have a diversified account that works for you and your lifestyle is the best way to ensure that you have a comfortable retirement.

It can be hard to save money for the future when more pressing money matters arise, like the need to pay down college debt or the costs associated with having a child. But if you start now, and start small, you can ease up on what you save later for retirement.

Aim to save at least 15% of your income annually for retirement.

Key takeaways

• Fidelity's rule of thumb: Aim to save at least 15% of your pre-tax income each year for retirement.
• The good news: This 15% goal includes any contributions you may get from your employer.
• Remember: Your personal target saving rate may vary depending on a variety of factors, including when you plan to retire, your retirement lifestyle, when you started saving, and how much you've already saved.

Who doesn't have a retirement dream? Yours may be as simple as sleeping late or riding your bike on a sunny afternoon, or as daring as jumping out of a plane at age 90. Living your retirement dream the way you want means saving now—and saving enough so you don't have to worry about money in retirement.

How much should I save each year?

Learn more about our 4 key retirement metrics—a yearly savings rate, a savings factor, an income replacement rate, and a potentially sustainable withdrawal rate—and how they work together.

But how much is enough?

Our rule of thumb: Aim to save at least 15% of your pre-tax income¹ each year. That's assuming you save for retirement from age 25 to age 67. Together with other steps, that should help ensure you have enough income to maintain your current lifestyle in retirement.

How did we come up with 15%? First, we had to understand how much people generally spend in retirement. After analyzing reams of national spending data, we concluded that most people will need somewhere between 55% and 80% of their preretirement income to maintain their lifestyle in retirement.¹

Not all of that money will need to come from your savings, however. Some will likely come from Social Security. So, we did the math and found that most people will need to generate about 45% of their retirement income (before taxes) from savings. And saving 15% each year, from age 25 to age 67, should get you there. If you are lucky enough to have a pension, your target savings rate may be lower.

While 15% may seem like a lot, if you have a 401(k) or other workplace retirement account with an employer match or profit sharing, that counts toward your annual savings rate.

Here's a hypothetical example. Consider Joanna, age 25, who earns $54,000 a year. We assume her income grows 1.5% a year (after inflation) to about $100,000 by the time she is 67 and ready to retire. To maintain her preretirement lifestyle throughout retirement, we estimate that about $45,000 each year (adjusted for inflation), or 45% of her $100,000 preretirement income, needs to come from her savings. (The remainder would come from Social Security.)

Because she takes advantage of her employer's 5% dollar-for-dollar match on her 401(k) contributions, she needs to save 10% of her income each year, starting with $5,400 this year, which gets her to 15% of her current income.