Do You Really Need 10X Your Salary Saved by Retirement, or Is That Just a Myth?

Saving for retirement is something a lot of people don't manage to do. And there's a reason for that.

Life has a way of being expensive. By the time you're done paying the mortgage, stocking the fridge, and putting gas in your car, there may not be much money left over for IRA or 401(k) plan contributions.

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But if you don't save for retirement, you may end up having to live on just Social Security later in life. And that could mean having to scale back on spending substantially, considering that if you earn an average paycheck, your Social Security benefits may only replace about 40% of it.

If you're in the habit of funding an IRA or 401(k) regularly, you're doing your part to set yourself up for a comfortable lifestyle down the line. But how much should you be saving? Without an end goal, it can be hard to know how much money to allocate each month or year to a retirement account.

Fidelity says that if you want a comfortable retirement, aim to save 10 times your final salary. So if, hypothetically, you're earning a $120,000 salary toward the end of your career, your savings goal should be $1.2 million.

It's advice many financial experts tend to quote. But do you really need to save 10 times your salary? Or can you get away with less?

It's a matter of the type of retirement you want

Many people find that their living costs go down once they're retired. If your home is paid off by then and you're not spending hundreds of dollars commuting, your total costs may be less in retirement even when you factor in potentially higher healthcare expenses and more money spent on leisure.

Still, your expenses may not drop so drastically in retirement. A good rule of thumb is to expect to need 80% of your former income to cover your costs without worry. So let's run some numbers to see if saving 10 times your salary is really necessary.

Using Social Security's quick calculator, someone aged 63 earning $120,000 a year right now can expect a monthly benefit of $2,971 at full retirement age. For simplicity, we'll round that up to $3,000 for an annual income of $36,000.

Replacing 80% of a $120,000 salary means needing $96,000 a year, $36,000 of which is taken care of by Social Security. To be able to withdraw $60,000 a year from savings at a rate of 4% per year, which is what experts tend to suggest, you need $1.5 million in savings.

A $1.2 million nest egg gives you $48,000 a year when use a 4% withdrawal rate. That gets you to $84,000 per year, or 70% of your pre-retirement income. So in this example, saving 10 times your salary for retirement may not actually be enough if you're looking to replace 80% of your former paycheck.

That said, you may be planning to downsize your home, thereby reducing your property taxes, insurance, and utility bills by 50%. You may also have plans to get rid of your car and use a combination of public transportation and your feet to get where you need to go.

Or, you may be planning to work part-time in retirement. In any of these situations, you may not need 80% of your former salary, or even 70%, to have a comfortable lifestyle.

Your savings goal should depend on you

You may find it helpful to have a savings goal to aim for in the course of building your nest egg. But what you may want to do is use Fidelity's guidance as a starting point and make adjustments from there.

The purpose of saving for retirement is to avoid financial struggles later in life. If you can exist comfortably on half of your former salary, then you may not 10 times that amount socked away in an IRA or 401(k). And there's no reason to lock yourself into that target if you're confident you'll be able to get by on less.

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