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The 70% Rule for Retirement Savings: A Comprehensive Guide

Planning for retirement can be daunting, but understanding the 70% rule for retirement savings can help you estimate the amount of income you may need to retire comfortably. This rule suggests that you’ll need 70% of your pre-retirement, post-tax income to maintain your lifestyle in retirement. In this article, we’ll explore the 70% rule, how to calculate your retirement savings, and tips for saving more effectively.

The 70% Rule for Retirement Explained

The 70% rule for retirement savings is a guideline that helps you estimate your future retirement spending. By multiplying your post-tax income by 70%, you can get a rough idea of how much you’ll need annually in retirement. For example, if your current post-tax income is $72,000 per year, your future annual retirement spending would be around $50,400, or $4,200 per month.

It’s important to note that actual retirement spending varies for each person. Factors such as debt, home ownership, and lifestyle choices can influence this percentage. Therefore, the 70% rule should be used as a starting point rather than a strict rule.

How to Calculate What You Should Have Saved

To determine if you’re on track with your retirement savings, you can use age-based milestones suggested by Fidelity. These milestones assume that 45% of your income will come from retirement savings, with the remainder supplemented by Social Security.

• Age 30: Have the equivalent of your annual salary saved. If your salary is $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 ten times your salary saved.

For example, if you’re a 40-year-old advertising sales agent making the median salary of $73,260, you should have three times your salary set aside for retirement, or $219,780. If you’re 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.

These milestones are targets and may not always be achievable depending on your lifestyle and cost of living. However, having a goal can help you stay on track.

Why 70%?

You might wonder why the rule suggests 70% of your post-tax income rather than 100% or another number. Several factors contribute to this:

• You won’t have Social Security and Medicare taxes withheld from your retirement withdrawals, which account for 7.65% of your income (or 15.3% if you’re self-employed).
• You’ll pay less income tax after retirement since your income will be lower.
• You won’t need to save for retirement once you’re retired, reducing deductions from your monthly income.
• Your spending will likely decrease after retirement, especially on housing, debt payments, and transportation.

Tips for Saving More for Retirement

If you want to boost your retirement savings, here are some effective strategies:

Increase Your Contributions

Find out the contribution limits for your retirement accounts and increase your regular contributions if possible. Whenever you receive extra money, such as cash gifts or bonuses, consider putting it toward your retirement 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, make sure to contribute at least enough to get the maximum match. This is essentially free money toward your retirement. Be aware of the vesting period, which is the time you need to stay with the company to keep the matched contributions.

Open an IRA

An Individual Retirement Account (IRA) allows you to make tax-free or tax-deferred contributions to your retirement. You can contribute up to $6,500 annually, with an additional $1,000 if you’re 50 or older. There are two main types of IRAs:

• Traditional IRA: Allows tax-deferred contributions, meaning you won’t pay taxes until you make withdrawals in retirement.
• Roth IRA: Allows post-tax contributions and tax-free withdrawals after five years. Contribution 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. 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 hinder your progress. You’ll miss out on potential interest earnings, and withdrawals from a traditional IRA before age 59½ or from a 401(k) before age 65 incur a 10% penalty and taxes. Exceptions exist, but income taxes still apply.

The Bottom Line

Estimating your retirement spending can be challenging, but using the 70% rule as a benchmark can help you set a retirement savings goal. Don’t get discouraged if you feel behind; maintaining regular contributions and looking for opportunities to save more can help you build a sizable nest egg over time.

At O1ne Mortgage, we understand the importance of financial planning for a secure retirement. If you have any mortgage service needs or questions about retirement savings, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you achieve your financial goals.

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