How Much Should I Have in Savings? (2024)

If you’re like many Americans you may worry you’re saving too little—or even be unsure how much to save in the first place.

There is plenty to put away extra money for—from emergency expenses like home repairs and doctors’ bills to your kids’ education and, of course, your retirement. Knowing the right amount to save—and getting a good start toward your savings goals—can help you avoid unnecessary stress, not to mention potential credit card debt.

And when you are ready to stop working, a healthy retirement savings account will allow you to maintain financial independence. “We save so that we have more freedom,” says E.J. Kahn, a financial planner with SLK Private Wealth, in Los Angeles.

While saving takes discipline, it’s not rocket science. The first step is figuring out how much you need to save for each important goal in your life, whether it’s building a rainy-day fund or a healthy 401(k).

While everyone’s situation is unique, here are some rules of thumb—both simple and more nuanced—about how much to save.

How much should I have in emergency savings?

When it comes to financial planning, building emergency savings should be most people’s first order of business. By helping to ensure financial stability, it paves the way for goals like buying a house or saving for retirement.

Financial advisors typically recommend keeping an emergency fund of between three and 12 months’ living expenses. This stash is meant to cover routine expenses should you find yourself out of work, as well as unexpected expenses like medical bills or home repairs. That way, “you won’t have to upend your life,” in the face of the unexpected, says Patrick Fruzzetti, a financial advisor with Rose Advisors, in New York.

Whether you need three months’ worth of cash or more depends on your situation. If you’re single and in your early 20s, less savings might be acceptable because young people often find it easier to land a new job quickly after a layoff. On the other hand, losing a job in the midst of a recession could be disastrous for a middle-aged breadwinner supporting a family. Such a person might need a year or more of living expenses in the bank to sleep well at night.

Building an emergency fund that large may seem daunting, especially as inflation strains household budgets. If you can’t sock away a big chunk of cash at once, save smaller amounts consistently. Before you know it, you’ll have enough to cover that surprise plumbing or auto repair bill. On the other hand, if you’re expecting a fat tax return, you’ll have a chance to jump-start your emergency savings. Before you know it, you’ll have enough cash to cover that surprise plumbing or auto repair bill.

How much should I have in retirement savings?

Saving for retirement helps to ensure financial security and independence—not to mention the opportunity to travel and live it up a bit—as you grow older. Because many of us are now living into our 90s, it pays to start saving as early as possible. But how much will you ultimately need? There is no single answer but here are a few widely accepted approaches.

10x your salary

When you’re young and just getting started with retirement savings, all you really need is a target that will get you in the ballpark. One of the easiest to use and understand: Shoot to save 10 times your annual salary by age 67, which is considered full retirement age for Social Security purposes.

You might do a double-take once you make your calculation, but never fear: You likely have many years to build those savings. Fidelity suggests breaking the process down into age-based milestones.

A simple approach to saving 10 times your salary is to put away a percentage of each paycheck. If you start at age 25, then stashing 15% of your income should ultimately get you close to your retirement goal.

If you’re starting later, say at 35, you’ll need to save about 20% of your pay. As you get closer to retirement, you’ll gain more clarity into how much income you’ll need. As a result, you may need to make some catch-up contributions to your nest egg or, if you’re lucky, you may even be able to slow down. When it comes to calculating your income requirements, you’ve got options.

Enough to replace 80% of your income

It’s hard for younger people to predict their retirement income needs, but by the time you’re 55 or so, the cost of your lifestyle should be pretty clear. Thus, while a target like 10 times your salary is a fine goal when you’re just starting out, you’ll need to fine-tune your target as you get closer to retirement. One way to do that is to assume that you’ll need to replace 80% of your current income when you’re no longer working.

The thinking behind this rule of thumb is that retirees only need about 80% of their preretirement income because they’ll no longer need to save or contribute to Social Security and Medicare. They may have paid off their mortgage. Work-related expenses like commuting and dry cleaning will decrease as well.

How the math works

Based on the 80% rule, if your annual preretirement budget was $150,000, you’ll need $120,000 per year in retirement, after taxes. Part of that will come from Social Security; you might also have a pension or annuity. The rest needs to come from your savings.

So how do you translate that into a savings goal? Let’s suppose a 65-year-old couple has a $120,000 annual budget and expects to live until age 90. Their combined Social Security payments, after taxes, will total $50,000. Thus, they’ll need an additional $70,000 annually for 25 years.

Once you get to that point, you can figure out your magic number—how much you actually need to save to have a good shot of meeting your income target—using an online calculator like this one.

In this couple’s case, assuming inflation of 4%, and a conservative after-tax rate of return of 5%, the nest egg target would be $1.56 million.

25x your annual spending (aka the 4% rule)

Saving 25 times the amount you plan to spend each year in retirement is a good approach for those who are just a few years from retirement. While it may be more complex than the others, it offers the most planning flexibility: If your savings and income needs aren’t lining up, you can either increase your savings or lower your spending assumptions.

How the math works

The 4% rule and the 25-times rule are two sides of a coin: Diving 100% of your total savings by a 4% annual withdrawal rate gives you 25. And 25 years is a typical lifespan in retirement. Thus, you should be able to withdraw 4% a year of your savings over 25 years without running out of money. The interest and appreciation you earn on your savings should keep you a step ahead of inflation. So if you save, say, $1 million, you could safely spend $40,000 in the first year, and increase that amount a little each year to match rising prices.

The 4% figure has been the subject of some debate, so you may want to try out different assumptions based on your situation and expectations.

As with the 80% rule, you can use online calculators, like this one from Vanguard, to find your way to a specific savings goal. Let’s assume your goal was to spend $70,000 a year, increasing each year to match inflation. With $1.5 million saved, you’d be withdrawing 4.7% a year, and there would be an 80% chance your money would last 30 years, according to Vanguard’s calculator.

Not good enough to help you sleep at night? Up that savings target to $1.75 million—so you are spending 4% a year—and the chances your money will last increase to more than 90%.

How much should I have in college savings?

Few families can pay their children’s entire college expenses out of pocket, especially if they’ve got multiple kids. A good rule of thumb: Save at least a third of projected college costs.

The balance may be covered through financial aid, scholarships, current income and student loans. It’s a good bet that college inflation will continue to soar. Annual tuition, fees and room and board for a four-year in-state college is expected to cost about $34,500 in 15 years, while an average private college will cost about $79,000. That’s a cost increase for both categories of more than 50%.

Take advantage of a 529 college savings plan

To start, figure out how much you need to save by dividing anticipated college costs by the number of years until your child is likely to enroll. Remember that college savings can compound inside a tax-free 529 plan investment account: Assuming an average annual return of 7%, a contribution of $2,000 a year would yield nearly $60,000 over 15 years. Contributions and earnings are free from tax if used for qualified educational purposes. And thanks to recently passed legislation, unused 529 plan assets up to $35,000 can be rolled into a Roth IRA for the beneficiary.

Retirement savings should be prioritized over college savings, says Fruzzetti: “In an ideal world, you’d be able to save enough for retirement and college concurrently, but that’s not always possible.” The most realistic plan for many families is to save as much as possible. Even if you can’t reach that one-third mark, your savings now mean a little less in future loan payments for your child.

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