Retirement might seem far away, but saving consistently is the key to achieving financial freedom later in life. The amount you need to save each month depends on factors such as your desired lifestyle, current age, and expected investment returns.
If you’re aiming to retire by age 65, here’s a breakdown of how much you should set aside each month to stay on track and ways to maximize your savings.
How much money do you actually need for retirement?
A common rule of thumb is the “25x rule,” which suggests you should aim to save 25 times your expected annual expenses. For example, if you want to live on $50,000 per year from your savings, you’ll need around $1.25 million in retirement funds.
While this number might seem overwhelming, the key is starting early and sticking to a savings plan. By consistently saving and investing over time, you can reach your goal even if you’re starting small.
How much to save each month, based on your age
Since financial markets fluctuate, it’s impossible to predict exact future returns. However, a 7% annual return is a historically conservative estimate.
To retire by 65 with $1.25 million, here’s how much you need to save each month depending on when you start:
The power of starting early
The earlier you start saving, the less you need to contribute each month. This is thanks to compound interest, which allows small contributions made in your 20s to grow into a sizable nest egg over time.
For example, if you start at age 25, you only need to save $476 per month to reach $1.25 million. But if you wait until age 40, that amount jumps to $1,543 per month. This is why starting early, even with small amounts, can make a huge difference.
How to maximize your retirement savings
Even if you’re behind on savings, there are strategies to catch up and boost your retirement fund.
1. Take Advantage of Employer 401(k) Matching
Many employers offer a 401(k) match, which is essentially free money. If your employer matches contributions up to a certain percentage, make sure you contribute at least enough to get the full match.
For example, if your employer matches 50% of contributions up to 6% of your salary, that’s a 3% raise just for saving. Take full advantage of this benefit!
2. Use Tax-Advantaged Accounts
Retirement accounts with tax advantages can help your money grow faster. Some options include:
Traditional 401(k) or IRA – Contributions are made with pre-tax income, reducing your taxable income today. You pay taxes later when you withdraw funds in retirement.
Roth IRA or Roth 401(k) – Contributions are made with after-tax income, but withdrawals in retirement are completely tax-free.
Using these accounts allows your investments to grow without immediate tax burdens, maximizing your savings potential.
3. Increase Contributions Over Time
If you can’t save as much as you’d like today, start small and increase your contributions each year. For example, setting up automatic increases of 1% per year can help you gradually save more without feeling the impact on your budget.
It’s never too late to get started
If you’re behind on savings, don’t panic. There are still ways to catch up:
- Increase your monthly contributions – Even small increases can make a difference.
- Delay retirement by a few years – Working longer gives you more time to save and reduces the number of years your savings need to last.
- Adjust your investment strategy – A financial advisor can help you optimize your portfolio to balance growth and risk.
- The most important thing is consistency. Start saving whatever you can now, and your future self will thank you!
