How much to save each month for retirement

Step 1: a target

A common starting point is to multiply the yearly income you want from savings by 25. It comes from research on withdrawal rates (William Bengen's 1994 study and the later Trinity study): withdrawing about 4% of a portfolio in the first year and raising it with inflation lasted at least 30 years in most historical periods. So $50,000 a year means a target of about $1,250,000. Subtract any pension or state benefit you expect before you multiply.

Step 2: the monthly saving

Say you are 30, plan to retire at 65, have $20,000 saved, and expect a 6% yearly return. Over 35 years the $20,000 grows on its own to $162,471, and the rest needs $763.33 a month. You pay in about $340,600; growth provides the other $909,400.

Start at 40 instead, with the same $20,000 and 25 years to go, and the monthly saving more than doubles to $1,674.91. Ten years of waiting costs about $910 a month, because the money saved has less time to compound.

The formula, which the savings goal calculator works through, is (target − savings × (1 + i)^n) × i ÷ ((1 + i)^n − 1), with i the yearly return divided by 12 and n the number of months.

Returns: use a cautious rate

The return assumption moves the answer more than anything else. At 4% instead of 6% the same plan needs $1,279.46 a month. Long-run returns on a stock-heavy portfolio have been higher than on bonds or cash, with large swings along the way, and nobody can promise the next 35 years will match the last. A rate a little below what you hope for leaves room for bad decades.

Inflation: decide which money you mean

$1,250,000 in 35 years will not buy what it buys today. At 2.5% inflation the target in future dollars is about $2,966,506, and the monthly saving to reach it is $1,968.14. Two consistent ways to plan: use a target in today's money with a return after inflation, or raise the target by inflation and use the full return. The calculator's inflation field does the second.

Making the number manageable

If the monthly figure looks impossible, change one lever at a time and pin each result to compare: save a little more each year as income rises, work a few years longer, plan for a smaller income, or count part-time work in early retirement. Employer matching and tax-advantaged accounts count toward the monthly saving and make the same goal cheaper to reach.

A quick sense check

Many planners suggest saving 15% of gross income for retirement, including any employer contribution, from your twenties onward. On a $60,000 salary that is $750 a month, close to the $763.33 the example needs from age 30, which is a useful cross-check: the two methods arrive at similar answers from different directions. If your figure is far above 15% of income, the goal, the years or the return assumption may need another look.

In short

Set a target from the income you want (about 25 times the yearly amount), subtract what pensions will pay, and work back to a monthly saving with a cautious return. Decide whether you mean today's money or future money and stay consistent. Start as early as possible, raise the saving with each pay rise, and review the plan every year or two; a goal that looks out of reach at 30 often becomes manageable once employer contributions and later pay rises are counted. The savings goal calculator shows how each lever moves the monthly figure, and pinning one result lets you compare it with the next.