Saving enough for retirement is an extremely important goal everyone should be working toward but many tend to put off. However, neglecting your retirement savings can leave you in a terrible bind as you get closer to retirement. So how do you figure out how much to save for retirement? Here’s what you need to know about prioritizing your retirement savings at any age.

Why should I save for retirement?

There are plenty of reasons you’re not saving for retirement:

• You have bills to pay
• You assume Social Security will cover your living expenses through retirement
• You still have decades to go before retirement

Although these excuses for delaying — or even flat-out avoiding — your retirement savings may sound convincing, they don’t tell the whole story.

To start, paying your bills while you’re employed is much easier than trying to pay bills on a fixed income in retirement. And your bills are not necessarily getting smaller as you age. According to an annual Fidelity report on the cost of healthcare in retirement, a 65-year-old couple retiring in 2018 will need an average of $280,000 for their healthcare needs for the rest of their lives. You would hate to face illness in retirement (or even just the changes that accompany aging) without having an emergency cushion in place.

As for Social Security, the retirement benefit only replaces a part of your income, and as of 2018, the average monthly benefit is only $1,413. It would be very difficult to live solely on this amount of money, even in a low cost-of-living area.

Finally, assuming that you have years (or decades) before you need to worry about retirement means you miss out on years of compounding interest. The longer you wait to start saving, the more money you have to put away to ensure a comfortable retirement. You will be in a much better position if you start as soon as you can.

Calculating how much to save for retirement

Knowing that you need to set money aside for your retirement is only the beginning. Next, you have to decide exactly how much to save — and that means thinking ahead to the end of your career and becoming familiar with any contribution limits.

Any calculation of retirement savings needs to start with your intended retirement date. If you’re in your 20s, 30s, or 40s, it’s pretty safe to start with the assumption that you’ll work until you are 65, unless you specifically hope to retire earlier. If you are in your 50s, you might want to be more specific as to your anticipated retirement date.

The 25x rule

Once you have a target date for your retirement, you need to figure out how much you will need. In a perfect world, there would be a universally-agreed upon amount that would guarantee you an ideal retirement. Although there are plenty rules of thumb you could follow — like aiming for a $1 million nest egg — the amount you need may be more or less than that, depending on how much you make, where you live and what you plan to do in retirement.

The best way to figure out how much you need to save is by calculating your annual retirement expenses. This will be a rather large and detailed list, including any mortgages, vehicle costs, medications and healthcare, childcare, disability insurance. (Note: Don’t forget to include the cost of inflation in your calculations. It only takes 24 years of 3% inflation for the buying power of your money to lose half its value.)

When you have a rough idea of what you will be spending per year in retirement, multiply that number by 25 to get your savings goal. The idea is that you’ll need 25 times your annual expenses in order to retire — known as the 25x rule.

The 4% strategy

The 25x rule is based on the theory behind the 4% withdrawal strategy. Ideally, you should be able to withdraw 4% of your assets in the first year of retirement, and then increase the withdrawal amount to match inflation rate in subsequent years. You should also factor in dividends and capital-gains distributions that are paid in cash when calculating the total withdrawal amount for each year. Hypothetically, this will allow your savings to last at least 30 years.

The 4% strategy assumes your investments will continue to receive a rate of return that is at least 4% or higher per year. This is a relatively safe assumption since the historical rate of return on stocks tends to hover around 10% annually.

Unfortunately, this strategy may not serve retirees well in bad economic times. During years with sub-4% growth in the market, retirees have to either dip into the principal or drastically cut back on their spending.

Even though the 4% strategy can potentially be risky during market downturns, the 25x rule for retirement savings is still a helpful metric for determining your savings goal. It gives you a specific, measurable and achievable goal that you can adjust as necessary over time.

Retirement saving milestones by age

While there are a few forward-thinking go-getters who are doing these kinds of calculations just after landing their first job, most of us don’t think about retirement until we’ve been in the workforce for quite a few years. So how do you determine how much to save to reach your 25x expenses goal?

This is where some rules of thumb can really come in handy. You should take time to calculate the exact amount you’ll need, which you should do every few years to make sure you’re on track.

According to Fidelity’s widely accepted savings guidelines, you should aim for the following by each decade:

• 1x your annual salary saved by age 30
• 3x your annual salary saved by age 40
• 6x your annual salary by age 50
• 8x your annual salary by age 60

Adjust retirement plan as needed

While these guidelines and your 25x calculation can give you a decent target to shoot for, it’s important to remember your retirement goals should not be static. As your life changes, make sure you adjust your retirement strategy accordingly.

So if you get a big raise, have a child, see some major investment growth (or losses), move to a place with a higher or lower cost of living, or even decide to go back to school, you will need to adjust your retirement goals and expectations accordingly. That way you won’t be stuck following an outdated retirement goal that no longer meets your needs.

The early bird gets the compound interest

While it’s certainly possible to save for the retirement of your dreams even if you don’t start until your 40s or 50s, you will have to save more money to hit the same goal than you would if you’d started earlier.

That’s because of the power of compound interest, which you can calculate here. Here’s one example:

Let’s say that Jane (age 25), and Violet (age 45), start saving for retirement at the same time. They both hope to retire at 65. Jane starts putting away $200 per month, earning 8% interest, which is compounded annually. Violet starts putting away $400 per month at the same interest rate.

If Jane maintains her savings rate of $200 per month for the next 40 years, she will put away $96,000 total. But because of the compounding interest, her nest egg will be worth nearly $622,000.

Violet will also put aside $96,000 over 20 years if she maintains her $400 per month savings rate. However, her account will only grow to about $220,000 because the compound interest has only had half of Jane’s time to grow.

The bottom line

If you want a comfortable and well-funded retirement, the buck starts with you. Start by calculating your annual expenses in retirement and then multiply that number by 25. This will give you a reasonable goal to shoot for, although you will need to adjust your goals and expectations with the fluctuations of life.

Finally, the earlier you start saving, the easier it will be for your nest egg grow via the power of compound interest. That means that even though saving for retirement may not feel urgent, it truly is.