No one wants to work forever. By stashing away some of your income now for your future retirement, you can ensure a comfortable lifestyle despite a reduced income. But how much is enough? Many financial advisors recommend that you save around twice your annual income by age 40. However, your exact target depends on a variety of lifestyle and income factors.
Fidelity Investments recommends that an individual save two times his income at age 40. If you earn $50,000 a year, for example, you should have $100,000 saved. A Business Insider article, citing JP Morgan Asset Management's 2014 "Guide to Retirement," provides a more exact recommendation that depends on how much money someone makes at 40. Under this system, those in higher income brackets should save a higher percentage of their pay. For example, JP Morgan recommends that a person earning $75,000 at age 40 should have saved 1.6 times his annual salary, or $120,000. In contrast, someone earning $150,000 should have saved 3.2 times his annual salary, or $480,000.
One of the biggest variables that affects your retirement plan is how your income will change in the future. If you foresee your income increasing dramatically in the next few years, you might have a better opportunity to save later in life to catch up on any savings goals you fall short on now. Conversely, if you anticipate a career change where your salary remains stagnant, you're better off sticking to the suggested retirement savings plan. Also, consider whether or not you'll want to work part-time after you retire. Some folks want to kick back and relax after retirement, while others have the drive and opportunity to work part-time and supplement their savings.
Other changes in income are more difficult to predict, but are still worth considering. If you anticipate relying heavily on Social Security as a source of income after you retire, you'll want to keep tabs on any regulatory changes to retirement age and benefit amounts. If you have large amounts of passive income and investments, you should estimate how they'll fare down the road. Also consider the effects of your retirement savings vehicle. Traditional 401ks and IRAs are taxed at the time of distribution, whereas Roth IRA distributions come tax free. If your retirement savings are mostly from the former, you'll need to save more to cover the tax payments.
Along with how much money you expect to earn in the coming years, get a good grasp of how much money you think you'll spend. Consider how many children you have, or plan to have, along with any parents or family members that might need your financial support. The more people who depend on you financially after you turn 40, the harder it is to put money aside for retirement. In this case, think of ways to cut back spending in other areas so you can stick to the recommended retirement plan.