How Much of My Paycheck Should I Save? (2024)

If you’re wondering how much of your paycheck to save but don’t have any concrete goals in mind, there may be a better strategy.

Think about what you’re saving toward instead. Is it a comfortable retirement, a dream home, your kids’ college degree, an extravagant family vacation—all of the above?

“Understanding what your end goal is, is the first step,” says Mary Lyons, a financial advisor and founder of Benchmark Income Group in Dallas.

• How much to save for retirement
• How much to save for other goals
• How to start saving

One popular budgeting method, the 50/30/20 budget, recommends setting aside a total of 20% of your paycheck for your savings goals, including the magnum opus: retirement. Experts say that’s a fair rule of thumb.

“I think anyone saving more than 15% is in a good spot,” Lyons says, but it’s always better to be precise where you can. But, how to do that? Here’s what the experts suggest.

How much to save for retirement

Retirement is the most expensive goal many Americans will fund in their lifetime. But everyone’s picture of their golden years is different—and costs vary.

A 2022 Northwestern Mutual study revealed that U.S. adults estimate they’ll need $1.25 million, on average, to retire comfortably. To get there, you would need to set aside about $520 a month for 40 years, earning a 7% annual rate of return.

Say you’re earning a $50,000 salary today; that means you need to save about 12.5% of your pretax income in an account like a 401(k) or traditional IRA to reach $1.25 million. And with a nest egg that size, you’d be able to keep your income right around $50,000 annually throughout retirement.

Depending on your current expenses and income, saving that much of your salary may sound like a breeze—or out of the question.

There are five main factors to consider when it comes to setting your personal retirement savings target:

1. Time horizon

When you need your investments to start generating income—in other words: How many years do you have to save?

Those who are able to start saving early will get a huge advantage, thanks to compound interest. If you start consistently putting money into an investment account in your 30s, you’ll have double the amount by retirement as someone who didn’t start saving until their 40s.

Feeling behind? Don’t sweat. You can use catch-up contributions to save more than the standard limit each year in tax-advantaged retirement accounts.

2. Life expectancy

How long you need your nest egg to last. The average American has a life expectancy at birth of about 76 years, but women tend to live longer than men (79 years to men’s 73 years). Factoring in your family’s health history can lead you to a more accurate prediction.

3. Annual income target

How much income you need each year in retirement to maintain your lifestyle. The standard guideline is to aim to replace between 70% and 80% of your preretirement income, but Lyons thinks that’s too low. “I don’t know anybody who actively says, ‘I want to reduce my lifestyle when I retire,’” she says. In many cases, people are adding travel and leisure activities into their budget or in the gifting stage of their life—both of which require cash flow.

4. Account types

Where you save your money is as important as how much you put away, Lyons says. Traditional IRAs and 401(k)s are top options for maximizing returns and minimizing taxes, since you don’t have to pay income taxes on the investment earnings until after you retire. The downside is that the money can’t be accessed without paying a penalty until age 59 and a half. People who want to access their savings before then can use a regular brokerage account, or other tax-advantaged financial products like annuities, which pay a guaranteed stream of income for life, and whole life insurance.

5. Additional income sources

How much you anticipate getting from Social Security and other outside income sources, like an inheritance, should also be factored in. Data shows that Social Security benefits for someone retiring at 65 replace about 30% to 50% of prior earnings—the replacement share is higher for those at the lower end of the income spectrum. You can use this online calculator for an estimate of your future benefits (or this one for a quicker, rough estimate).

Use a retirement calculator

You can plug these variables into any online retirement calculator and see an estimate of how much you should be saving on a monthly or yearly basis to achieve your goal.

Or if you’re ready to really dig into the numbers, consult a financial advisor.They have access to more sophisticated software to help you understand the odds your money will last in all manner of scenarios, such as a recession; can tell you which stocks or mutual funds will be best for your portfolio; and help you minimize taxes as you spend down your nest egg.

Where to save for retirement

You should count yourself lucky if you work for a company that offers a retirement plan to employees. Only about 2 in 3 private industry workers have access to a retirement plan at work, according to the U.S. Bureau of Labor Statistics.

Employer-sponsored retirement plans like 401(k)s let you save far more each year than outside retirement accounts like IRAs—and the company may even contribute extra funds on your behalf. You can save up to $22,500 in a 401(k), 403(b) or 457 plan in 2023, compared with just $6,500 in IRAs. And you only have to pay income taxes on that savings when you take a distribution in retirement.

Many 401(k)s automatically enroll you to save around 3% of your pretax income, but employers will match those contributions at no cost to you.Experts say savers would be foolish to leave that free money on the table.

“If you want to retire after 59 and a half, those tools are great,” says Lyons. That’s the age when you can start withdrawing funds from a 401(k) or IRA without paying penalties.

If you want to retire earlier than that, she says, you’ll need to look at other tax-beneficial financial products too, such as annuities, that can pay out sooner.

How much to save for other goals

Savings targets for nonretirement goals also depend on your timeline and where you save the money. Here are some important considerations for emergency funds, down payments, and college savings.

Emergency fund

Before you start saving for any large future expenses, you need a safety net. “Making sure you have your emergency fund taken care of first is absolutely key, and then you can start looking at putting money into investments,” Lyons says.

An emergency fund is meant to cover at least four months of household expenses, says Brian Heckert, a financial advisor and founder of FSM Wealth, an Illinois-based wealth management firm. You should keep the cash somewhere easily accessible that carries no risk, such as a savings account, money-market account, or CD.

Emergency funds can be used to pay bills if you lose your job or “take care of the water heater, the flat tire, the broken windshield” and other costs that crop up, Heckert says.

Some experts encourage saving up to six months or more of recurring expenses in an emergency fund. The right amount for you may depend on how efficiently you can pare down your expenses in a sudden financial squeeze. If you live a big lifestyle or support other people, aim for more savings.

Down payment

How much you should save for a down payment depends in part on your home buying budget. You’ll generally need to have between 3% and 20% of the purchase price of the home upfront in cash, plus an additional 1% to 3% for closing costs.

A higher down payment is ideal, since it will unlock a lower interest rate, give you more starting equity in the home, and help you avoid paying for private mortgage insurance, or PMI.

Once you know your target down payment, it’s easy to figure out how much you need to save from each paycheck. Let’s say the number is $50,000 and you plan to buy a home in three years. You would need to save about $16,667 a year or almost $1,400 a month. If you’re paid bimonthly, that’s $700 per paycheck.

And since you need the money in relatively short order, it’s best to save into a high-yield savings account or a series of CDs where it’s easily accessible and earning a small amount of interest. An investment account would likely be too risky for this type of short-term goal.

College tuition

Increasingly, U.S. families are using 529 plans to pay for their kids’ college expenses.

These plans are similar to retirement accounts—you invest in stocks and bonds while your kid is young, and when they’re ready to go to college, you get tax-free withdrawals to pay for things like tuition, books and housing.

Also like retirement planning, there are several variables that factor into the calculation for how much you need to save, including: when your kid starts college, how long they’ll be in school, how much you’ll need to withdraw from the account each year, and how you’ll invest the savings along the way.

One major difference from something like an IRA is that 529s are sponsored by states, not the federal government. As such, your home state’s plan may offer significant tax breaks when you use it.

All 50 states and Washington, D.C., offer at least one 529 plan, but a few have several. If you already invest at a big retail firm, start by checking out the 529 plan it manages. You can compare the plan to others, like one from your home state, on databases like Saving for College and the College Savings Plans Network.

How to start saving

Starting with an overall 20% saving rate is not only daunting, but also unrealistic for young people saddled with student debt or living in an expensive city. “Not everybody can get to that,” says Heckert.

And in fact, if you’re paying off any debt with an interest rate of 8% or higher, you probably shouldn’t put your disposable income toward big goals like retirement just yet, Lyons says, because the interest charges can negate any stock market returns.

When you’re ready to prioritize retirement savings, Heckert says it’s OK to start with a single digit contribution percentage. A good rule of thumb is to contribute enough to your 401(k) or other workplace retirement account to clinch a full employer match, if your company offers it. For instance, it may match 100% of what you save each year, up to 3% of your salary.

Then, Heckert suggests, bump up your saving rate by 1% every six months. That’s an extra $1,000 a year on a $50,000 salary. The increases are so small that it’s like “tricking” your paycheck, he says. If you get a raise or switch to a higher paying job, you may be motivated to save even more.

“What we focus on is getting the money in first,” Heckert says, because the longer you wait to contribute to a retirement account, the less time your savings has to grow in the stock market. In many ways, starting early is more important than saving a lot.