Most people think about retirement savings as one big number or the total they’ll need by the time they stop working.

As a result, they often choose arbitrary contribution amounts for their 401(k)s and IRAs.

A better, more actionable (and less stressful) way to do this is to figure out how much you should save each year.

By doing this, you can appropriately adjust your annual savings target as your circumstances change, whether it’s a new job, a pay raise, a move, or another life event.

Rules of Thumb vs. Your Plan

When people attempt to Google or ChatGPT “How much should I save for retirement?”, they often encounter these “rules of thumb” that we have treated as fact such as:

Saving 20–25% of your income each year.
Having 3x your salary saved by age 40, 6x by age 50, and 8–10x by age 60
Using a simple retirement savings multiple based on age

While these methods can provide a quick gut check, they all share the same problem.. they’re far too generic.

They don’t account for:

The age you want to retire
Your desired lifestyle in retirement
Other income sources like pensions, rental properties, or part-time work
Taxes, inflation, and investment returns unique to your situation
Your desire to be give back to your family/ charities, etc.

A comprehensive financial plan can help you identify this much more precisely. It factors in all the moving parts of your financial life and tells you exactly how much you need to save each year. This way, you’re not left underfunded for retirement and in scrambling mode.

The Balancing Act: Tomorrow vs. Today

As a financial advisor, I constantly preach the importance of adequate retirement savings.

But, so is living a fulfilling life right now.

Saving too little may jeopardize your future freedom, but saving too much can rob you of experiences and opportunities in your healthiest, most active years. It has to be a balance.

A good financial plan helps you strike that balance by:

Ensuring your future retirement is fully funded.
Showing where you have room to enjoy more today without feelings of guilt.
Preventing you from stockpiling beyond what’s necessary at the expense of your current quality of life.

How to Calculate Your Annual Savings Target

Your Retirement Age Goal: 55, 60, 65? Retiring earlier means that you’ll need to save more every year because you’ll have more retirement years to fund and less time to accumulate wealth.

Other Income Sources: Social Security, pensions, rental income, etc. can reduce how much you need to save. If your guaranteed retirement income offsets your projected retirement spending, then you don’t need as much in the way of assets to sustain yourself in retirement.
Lifestyle Expectations: Higher spending in retirement means higher savings targets now.
Tax Planning Opportunities: Strategies like Roth conversions or capital gains planning can stretch your savings further by minimizing the tax you pay, thus, increasing your long-term wealth accumulation.

Factors That Change Your Savings Rate

Estimate Your Retirement Spending Needs
- Start with today’s expenses, adjust for inflation, and add/remove expenses that will be relevant or no longer relevant in your retirement years.
Project Your Income Sources
- Include Social Security, pensions, and investment income.
Find the Gap
- The difference between what you’ll have and what you’ll need is the amount your savings must cover annually.
Work Backward Through a Plan
- Use financial planning software or work with a qualified financial planner to build your retirement roadmap and calculate your exact annual savings target.

Pro Tip for 2025

If your income is higher than usual this year, maxing out tax-advantaged accounts helps you effectively save for retirement.

Here’s what you can put away into retirement accounts in 2025:

401(k), 403(b), and most 457 plans
- Under age 50: up to $23,500
- Age 50+: up to $31,000 (includes $7,500 catch-up)
- Ages 60–63: eligible for the super catch-up, allowing an additional $3,750 (adjusted for inflation) on top of the regular limit for a total of $34,750.
- Mega Backdoor 401(k): If your plan permits after-tax contributions and in-plan Roth conversions, you can go beyond the above limits, contributing up to the total annual additions limit (which includes both your contributions and your employer’s).
  - $70,000 (under age 50)
  - $77,500 (ages 50–59)
  - $81,250 (ages 60–63, with new super catch-up)
Traditional and Roth IRAs
- Under age 50: up to $7,000
- Age 50+: up to $8,000 (includes $1,000 catch-up)
Health Savings Accounts (HSA) (must have a high-deductible health plan)
- Individual coverage: $4,300
- Family coverage: $8,550
- Age 55+: add an extra $1,000 catch-up

If you are able to save beyond these levels, consider investing in a brokerage account. They do not have contribution limits, providing great flexibility and liquidity in your pre-retirement years.

Maximizing these accounts, especially in high-income years, can provide a significant boost toward your retirement target while delivering immediate tax benefits.

Know Your Number!

Rules of thumb can be a useful starting point, but they’re certainly not a substitute for a personalized plan. The most confident retirees aren’t guessing, they’re following a precise, annually updated savings target built from a complete financial plan.

If you’re unsure what that number should be for 2025, building or updating your plan now can ensure you’re saving the right amount. You’ll ensure that you’re not too little to risk falling short, and not so much that you miss out on enjoying your life today.

Have any questions about what you’ve read? Let’s talk about them!