How Much Should Retirees Have Invested by Age 65?

How much should you save for retirement? Most people who've not yet reached retirement age will answer with something vague along the lines of "as much as possible." Point well taken -- you can't really have too much money. Anything you end up not needing can be given to charitable causes.

There is a reasonably specific number, however, even if it's different for everyone. Here's how to determine yours.

The number

Sure, most people would love to live an incredibly posh lifestyle in retirement without any money-related worries. That's not realistic for most people growing their nest egg by saving their own money, though. For the average person or household, a more realistic goal is simply saving enough to maintain the standard of living in retirement that you achieved in your working years.

The underlying math to this end has been done more than once. All of it leads to the same basic conclusion. That is, at 65 years of age, you should have about 11 times your most recent annual work-based income tucked away in a retirement account. In other words, if you were making $100,000 per year right before you retired, you'd want $1.1 million saved up for your golden years.

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That's the suggestion from mutual fund company T. Rowe Price, anyway, although it's not etched in stone. The outfit's number-crunching says some retirees would be fine with as little as 7.5 times their last working year's salary saved up, while others might advise as much as 13.5 times their late-career annual earnings sitting in retirement savings.

T. Rowe Price isn't the only outfit to make this specific salary-multiple-based suggestion, either. Merrill Lynch says that the magic number at 65 years of age is around 10 times your pre-retirement salary. Mutual fund giant Fidelity puts the number at about 10 times your annual work-based income late in your career as well.

In all three cases, the assumption is that this amount of money will produce enough income to replace any work-based wages that are no longer being earned. How right or wrong this number is, however, largely depends on how you invest it once you're no longer earning a wage and therefore no longer adding cash to your nest egg. Presumably, these retirement portfolios will consist of a defensive mix of stocks and bonds, but that still leaves room for lots of variation in net performance. You'll want to be constantly vigilant with how you manage your allocation and risk once you're living on your savings.

A plan without a goal is just a wish

You can't start saving for retirement when that day is on the near horizon, of course. You'll want to begin tucking money away for your golden years as soon as you feasibly can in life, even if it's not much. Time is an investor's best friend.

Regardless, however much money you end up needing to save for a comfortable retirement, at least you've now got a target. And any plan with a specific goal is much more likely to work out than a more arbitrary savings goal like "as much as possible." Now you just need to start doing some backwards math to figure out what you need to be saving here and now to reach that goal then.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends T. Rowe Price Group. The Motley Fool has a disclosure policy.