When thinking about our financial goals for later in life, one of the most common questions is: ‘How much savings should I have when I’m X years old?’ This, of course, depends on a number of factors: income, lifestyle and the longer-term financial goals you want to achieve.
But with the right basis, it’s easy to develop an approach for your financial milestones at different ages, so that you can start living the life you deserve. The following article is a deep dive into the savings targets you should aspire to at different ages, and how to achieve them.
Why Savings Matter at Every Age
Our lives turn into a succession of different goals and targets, and saving is necessary in order to achieve any of them, especially as we get older. For example, we need an emergency fund, we have long-term goals to afford a home, or we are planning to have children which can be financially demanding.
For most, income increases with age, and with good financial planning, so should savings. Surprise expenses or poor financial management can derail progress, but helpful benchmarks for savings based on age and savings goals can help the planning.
The General Rule of Thumb
One common rule of thumb for figuring out how much you should have saved by age X is to use a multiple of your salary at age X. As a general rule, financial experts typically recommend that by age X you should try to have:
By age 30: 1x your annual salary
By age 40: 3x your annual salary
By age 50: 6x your annual salary
By age 60: 8x your annual salary
By age 67: 10x your annual salary
These targets are based on the concept that by retirement age, you will want to have saved roughly 10 times your annual salary to sustain your desired lifestyle, which may or may not include where you live and what that costs. Other considerations might include whether your annual spending matches your retirement goals (meaning that spending $60,000 a year at 65 doesn’t seem right to you). Other aspects of your budget might include other financial commitments (such as debt) you have now or might have in the future.
Now, let's break this down into more detail for each decade of your life.
In Your 20s: Building a Financial Foundation
If you are in your 20s, you may just be starting your career, your income may be small, and you might be paying off student loans or trying to live independently. It can be hard to save in your 20s, but the habits you cultivate during this decade are crucial.
Savings Goals:
Emergency Fund: Try to have three to six months’ worth of living expenses saved. This is the ‘just in case’ bucket – your buffer in case you lose your job, have medical costs, or face some other unforeseen expense.
Save for retirement: Begin saving for retirement, probably in the form of a 401(k) or IRA, as early as possible. If possible, try to contribute at least 10-15 per cent of your income.If your employer matches your contributions, use that to your advantage.
Debt: Pay down your student loan and/or credit card balances, but stay mindful of putting money away while you do this.
Savings Target by Age 30:
By the time you turn 30, experts say, you should have saved one times your annual salary. So if you work for the same salary as me – $50,000 a year – then, theoretically, you should have $50,000 saved.
Tips for Success:
Automate your savings. Set up automatic transfers to your savings account and retirement accounts.
Learn to budget. Tracking your expenses will help you find opportunities to save more.
Save for an emergency fund first, but make sure you are also saving for retirement because compound interest works best over the long term.
In Your 30s: Growing Your Wealth
By your 30s, you are likely to be a major life transition – a continued rise up the career ladder, a family and a house purchase – or all of them are likely to be hitting your life. Your salary will be higher than it was in your 20s, and this is the decade to begin ramping up your savings.
Savings Goals:
Retirement: Keep saving 10-15 per cent of your income for a nest egg, and try to save 15-20 per cent once your salary rises.
Homeownership: If homeownership is a personal goal, you can begin to save for a down payment. Typically 20 per cent of the price of the home you hope to purchase is the goal.
Kids: If you are planning to have children, you may want to plan for the expense of schooling (college), medical expenses and basic child-raising costs. You also may want to start a college savings plan (e.g. 529 plan).
Emergency Fund: As your income, family, and commitments increase, so should your emergency fund. Keep it at 3-6 months’ living expenses.
Savings Target by Age 40:
Most financial advisors advise that, by age 40, you should have saved three times your annual income. To stay on track, if you are making $75,000 per year, your goal is to have $225,000.
Tips for Success:
Increase your contributions to your retirement accounts as your income grows.
Avoid lifestyle inflation. Just because you're earning more doesn't mean you should spend more.
Prioritize paying off high-interest debt, such as credit cards.
In Your 40s: Peak Earning Years
You are in your peak earnings years in your 40s, and this is the time when you need to ramp up your retirement savings big-time. Your average 40-year-old is also likely to be undergoing some of the biggest money challenges of a lifetime, such as putting kids through college and supporting ageing parents.
Savings Goals:
Retirement: Save at least 15 to 20 per cent of your income to retirement accounts, either through your workplace retirement plans or savings vehicles outside your workplace. If you are currently far behind on retirement savings, you can still do this, but you need to catch up by saving even more aggressively.
College Savings: If you have kids, whether you’re able to pay for them to attend college or not, open up a special account if your employer offers it in case you have money left over at the end of the month.
Mortgage: If you own a home, paying off your mortgage or saving for home improvements or repairs could benefit you.
Emergency Fund: Keep your emergency fund equal to 3-6 months of living expenses in case you find yourself unemployed so that you can weather a job search without worrying about the next mortgage or rent payment. That’s especially important as your financial obligations grow.
Savings Target by Age 50:
You should be looking to have six times your annual income in the bank by the time you are 50 – say $600,000 if you have a $100,000 salary.
Tips for Success:
Contribute as much as you can to your retirement. A person can start 401(k) or IRA catch-up contributions at age 50.
And if you’re setting aside money to help your children finance college, be sure it’s not at the expense of your retirement savings. You can borrow for college, but not so easily for retirement.
Pay down any high-interest debt to free up more money for savings.
In Your 50s: Preparing for Retirement
You’ve entered your 50s and retirement is almost in sight. Now’s the time to make sure you have enough stashed away to carry you through your retirement. By the way, this is also the age when people should begin to look ahead to healthcare expenses.
Savings Goals:
Retirement: The golden rule for your golden years is to continue adding to your retirement account. If you haven’t already, increase the amount you put into your retirement account and take full advantage of any catch-up contributions that are available (eg, in the US, once you turn 50 you can put an extra $6,000 or so in your company retirement plan or an IRA).
Healthcare: Ifdeductible health plan, you may want to consider putting money into a Health Savings Account (HSA) to cover health costs in retirement
Mortgage: Try to pay off your mortgage before you retire. Getting rid of a mortgage payment can dramatically lower your costs in retirement.
Long-Term Care: Do you need long-term care insurance or other coverage of potential expenditures for long-term care in old age?
Savings Target by Age 60:
By age 60, you might hope to have saved eight times your annual salary, so if you earn $120,000 a year, your savings goal should be around $960,000.
Tips for Success:
Ferret out healthcare costs in retirement. Medicare does not pay for everything, so plan for the cost of supplemental insurance or out-of-pocket medical expenses.
And if you’re not on track for your savings goals, consider working longer, retiring later, or working part time in retirement in order to keep your withdrawal rate down.
Review your investment strategy and adjust for your risk tolerance as you approach retirement.
In Your 60s: Transitioning to Retirement
Your 60s should be your time to transition into retirement. Just make sure your nest egg runs out after you do. A critical success factor is the plan to withdraw funds without emptying the account.
Savings Goals:
Withdrawals in Retirement: Plan to withdraw between 4 and 5 per cent of your savings a year. This is the ‘4 per cent rule’.
Social Security: Decide when to apply for Social Security benefits. By waiting to receive benefits, you can get bigger monthly payments. If you can afford to wait until your late 60s or even 70, you should consider it carefully.
Healthcare: Ensure you have adequate healthcare coverage, including Medicare and any supplemental insurance.
Savings Target by Age 67:
The golden rule is that by the time you retire you should’ve saved 10 times your annual salary. So if your annual salary is $150,000, you should have close to $1.5 million saved for retirement.
Tips for Success:
For instance, consider working part-time in retirement to help delay withdrawals and allow your investments to grow.
Make sure that your portfolio is properly diversified so that it matches your risk tolerance. Review your investment strategies.
Make sure your estate plan is up-to-date, including your will, beneficiaries, and healthcare directives.
How much to save at each stage of life depends on your personal circumstances but the benchmarks below should get you started on creating a solid savings plan. The plan will likely change as you age, as your income, lifestyle and financial goals do.
To reach these milestones, it’s important to:
- Start saving as early as possible to take advantage of compound interest.
- Contribute regularly to retirement accounts and increase contributions over time.
- Avoid lifestyle inflation and keep expenses in check, even as your income grows.
While those are good practises, your own financial journey is a one-off, and you might need more or less in savings than I (or the ‘experts’) suggest. If you have a long horizon until retirement, you might be comfortable with lower savings targets to save more for early retirement, or to live in the most expensive city in the world. The way forward is simple: be disciplined, set aggressive savings targets – and track your progress and continuously adjust towards your goals so you will be ok in the long run.