When I was younger, a close friend of my parents used to tell me regularly that if I saved 10% of every dollar I made, I would be a millionaire in retirement. As I got older, I saw this 10% target retirement savings rate referenced in personal finance books and by financial planners. While I love the simplicity of the 10%, it always bothered me that the rule was so consistent. What if you saved more while you were younger? What if you were already 35 and hadn’t started saving yet? Would 10% be enough? Or maybe too much?
The basics of consistency and thoughtful spending are universal for long-term financial success. But after that, personal finance is unique to each of us and our goals. So, after years of wondering, I created a simple calculator (with the help of Chris from Keep Thrifty) to help you determine your own personal target retirement savings rate. Just enter a few numbers that reflect your situation and views of the world and find out how what percentage of every dollar you make you need to save to reach your retirement goals!
Target Retirement Savings Rate Calculator
Step 1: Enter your family’s current age and income
This is the basic information we need to know where you are starting
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Step 2: Enter your family’s retirement goals
This is where you input your goals and beliefs about the future
Estimate your monthly spending in retirement – in today’s dollars!
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Don’t have a sense of your regular spending? Click here to learn how to create a budget!
Step 3: Estimate your Social Security benefits
Social Security benefits are estimated below based on the 2017 benefit formula and only takes into account your current salary
Want to know how Social Security benefits work? Click here for the basics!
Step 4: Estimate market returns and inflation
Estimate what return you expect to get on your retirement investments
Input your estimate for inflation. About 2% has been the long-term average.
Need to know more about the essentials of asset allocation and investing? Click here!
Step 5: Estimate your withdrawal rate
Advanced: Set a withdrawal rate you are comfortable with
Step 6: See how much you need to save
To sustain yourself through retirement, you need to reach in savings by age .
Step 7: Discover the percentage of your pre-tax income your family needs to save for retirement!
Based on your assumptions entered above, this is the percentage of your family’s income you need to be saving between now and retirement to reach your goals
Based on your annual investment return estimate, your family needs to save of your total pre-tax income. For this year, that means $1118 per month. Be sure to reduce this target percentage by any employer retirement savings match!
Bonus: How would your retirement accounts look over time?
Your retirement accounts will grow from investment returns and new contributions over time, then deplete through retirement based on your withdrawal rate
Notes on Using the Target Retirement Savings Rate Calculator
The Target Retirement Savings Rate calculator above is easy to use and walks you through each and every step. However, here are some tips on getting the most out of the tool.
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Add Your Retirement Goals and Investment Outlook
- Target Retirement Age: At what age do you want to retire? Do you think you will retire at the traditional age of 65 or aim to retire early and pursue more of your passions? Feel free to play with these ages to see how it impacts your target retirement savings rate. Sometimes a small increase in savings can buy you a few more years of retirement!
- Family Expected Monthly Retirement Expenses: How much do you plan to spend each month in retirement? Feel free to use your current spending as a guide, but remember that some expenses change in retirement. You will no longer have to commute (woo!) or purchase a work wardrobe, but you may want to travel more! Don't build inflation into this number as the worksheet does it automatically!
- If you don't have a budget today, I highly recommend setting up a regular budget. It is the only way to know how much you'll need in an emergency or in retirement.
- Monthly Social Security Estimate: If you are 30 years away from retirement, Social Security may look different when you cut into your farewell cake. But, despite scary headlines, it is unlikely to completely disappear. The Target Retirement Savings Rate spreadsheet uses your current income, along with the 2017 Social Security benefit formula, to roughly estimate how much you could expect to receive from age 65 on.
- Advanced - Haircut to Social Security: If you plan to retire before 65, won't have 35 years of work history when you retire, or if you believe Social Security will be significantly diminished in the future, you can reduce the benefit by haircutting it. If you think Social Security won't exist at all for you, put in 100%.
- Expected Annual Investment Return: This will depend on how your money is invested (stocks, bonds, CDs, cash) and your overall asset allocation. Over the past 100 years, the S&P 500 has averaged an annual return of 10%. I believe a 7% rate is a fair estimate for people 10 or more years away from retirement with an 80/20 stock-bond split.
- Inflation Estimate: Inflation has averaged about 2% a year over the long-term and as such is a fair estimate. But if you think inflation will be higher or lower, or just want to see the impact of that inflation on your savings needs, you can change it here.
- Advanced - Withdrawal Rate: Your withdrawal rate is what percentage of your savings you need to withdraw per year to live in retirement. Backtesting has not shown a period where a 4% withdrawal rate depleted a nest egg in less than 33 years. As such, it has become the baseline for retirees. But a 3% withdrawal rate is even safer, while a 5% rate is more aggressive and could be depleted within your lifetime if the market moves against you.
See Your Savings Rate Goals!
Once you input your assumptions, the calculator will automatically let you know how much of each dollar you make needs to be put into retirement accounts to reach your goals! It will also show you the total retirement account value you need to see before you give your notice.
Try not to be daunted by a potentially large number! You'll save progressively over the years. And growth on the dollars you invest over time will help you reach your goals.
Don't forget to build your existing employer retirement contributions, plus match, into your savings rate!
Bonus: How Will Your Nest Egg Grow Over Time
The goal of this calculator is to give you a frame of reference for your retirement savings rate needs. But, to help you see how your rate will grow your nest egg over time, I wanted to include a quick asset projection. This chart shows you how your retirement accounts could look if you maintained your savings rate.
It also shows you how that value would deplete in retirement! Most people move their investments into safer options once they retire, to preserve their wealth. But depending on how conservatively you invest that money in retirement, the faster you will use up your nest egg. You can change your expected investment return in retirement in this part of the worksheet to see how your family's savings would move over time.
What percentage of your income do you need to save to reach your goals? Are you saving more or less than that today? How can you make changes to reach your goals? Drop a note in the comments and let me know about your unique situation!
From one spreadsheet geek to another – I love it! 🙂
Glad you like it! Always fun to build new spreadsheets/calculators 🙂
This is pretty cool. People need help with some of these basic yet important habits. This should help.
My own approach is a little different. It has worked for me. I set an artificially low “salary” to come into my checking account each month for spending. The rest is automatically wired into investment accounts. There is nothing for me to do and I never see the money. Keeping my grubby hands off it is key for me. Until I set it up that way I would have periodic increases in my checking account (from a bonus, raise, or year-end increased take home after maxing retirement or social taxes) I call it pay yourself last. I used to have a fixed savings rate, but now that it fluctuates it seems easier to save more. I’m not good at explaining it though. Check here if interested: https://www.physicianonfire.com/?s=pay+yourself+last
This was fun and interesting to play around with. However there is one part that seems be backwards. Maybe I am not understanding it correctly, but with the withdraw rate, I put in 4% and my savings target is at 1.5 mil. I put in 3% withdraw rate and it jumps to 2.2 mil. Shouldn’t my savings target decrease with a decrease in my withdraw rate?
Thanks!
Glad you enjoyed it, Chris! And no, the lower your withdrawal rate, the more you need to save. Your withdrawal rate is the percentage of your total assets you plan to withdraw each year. If you want to spend $2,000 a month in retirement ($24,000 a year) with a 4% withdrawal rate, you need $600,000. $24K is 4% of $600K. If you want to use a more conservative 3% rate to ensure you don’t ever run out of money, you need to save an $800K nest egg.
OK thanks! Yea I was thinking about it differently. I was starting with my overall amount saved as the constant and wondering what 3% would look like from that. Where this is spreadsheet is calculating the savings based on the yearly withdraw being the constant and not the savings. ?
This is incredible! Great work on creating a straightforward and intuitive tool. I will be definitely recommending this to all of my friends and family!
I love how this calculator has two people included!! I haven’t seen any with this feature before. Most of us aren’t retiring as individuals.