How Much Should Millennials Save for Retirement?

Many millennials are behind on retirement savings due to student debt, high living costs, and delayed career starts. With traditional pensions rare and Social Security’s future uncertain, saving early is essential for long-term financial stability.

Understanding how much to save depends on expected expenses, investment returns, and lifespan. Making informed decisions now can shape financial security in retirement.

Calculating Retirement Needs

Estimating retirement savings starts with identifying future expenses, including housing, healthcare, food, transportation, and discretionary spending. Inflation complicates projections, as costs rise over time. Healthcare costs, in particular, tend to increase faster than general inflation. Fidelity estimates that a 65-year-old couple retiring in 2024 will need about $315,000 for medical expenses alone.

A common benchmark is the 4% rule, which suggests withdrawing 4% of retirement savings annually to maintain a steady income. Under this rule, someone needing $40,000 per year in retirement would require $1 million saved. However, this assumes a balanced portfolio of stocks and bonds and does not account for market downturns or unexpected expenses.

Social Security benefits can supplement savings, but relying too heavily on them is risky. The Social Security Administration projects that by 2034, the program may only be able to pay about 80% of scheduled benefits unless adjustments are made. This uncertainty makes personal savings even more important.

Tax-Advantaged Savings

Using tax-advantaged accounts helps money grow faster by reducing tax liability. Understanding these options can maximize savings.

401(k)

A 401(k) is an employer-sponsored retirement plan that allows employees to contribute pre-tax income, lowering taxable earnings. In 2024, the contribution limit is $23,000, with an additional $7,500 catch-up contribution for those 50 and older. Many employers offer matching contributions, which is essentially free money. For example, if an employer matches 50% of contributions up to 6% of salary, an employee earning $60,000 who contributes 6% ($3,600) would receive an additional $1,800 from their employer.

Withdrawals in retirement are taxed as ordinary income, and early withdrawals before age 59½ typically incur a 10% penalty plus income tax. Some exceptions exist, such as for medical expenses exceeding 7.5% of adjusted gross income or a first-time home purchase up to $10,000. Required minimum distributions (RMDs) begin at age 73, meaning retirees must start withdrawing a set amount each year based on IRS life expectancy tables.

IRA

An Individual Retirement Account (IRA) offers tax advantages similar to a 401(k) but without employer involvement. The 2024 contribution limit is $7,000, with a $1,000 catch-up contribution for those 50 and older. Contributions to a traditional IRA may be tax-deductible, depending on income and whether the individual has access to a workplace retirement plan. For example, in 2024, a single filer covered by a workplace plan can deduct contributions fully if their modified adjusted gross income (MAGI) is $77,000 or less, with deductions phasing out up to $87,000.

Withdrawals in retirement are taxed as ordinary income, and early withdrawals before 59½ generally incur a 10% penalty. However, exceptions exist, such as for qualified higher education expenses or a first-time home purchase up to $10,000. Like a 401(k), RMDs begin at age 73.

Roth IRA

A Roth IRA differs from a traditional IRA in that contributions are made with after-tax dollars, meaning withdrawals in retirement are tax-free. This can be beneficial for those expecting to be in a higher tax bracket later. The contribution limits for 2024 are the same as a traditional IRA—$7,000, with a $1,000 catch-up for those 50 and older. However, income limits apply; for single filers, contributions begin to phase out at a MAGI of $146,000 and are eliminated at $161,000.

Unlike traditional retirement accounts, Roth IRAs do not have RMDs, allowing funds to grow tax-free indefinitely. Contributions (but not earnings) can be withdrawn at any time without penalty. Qualified withdrawals of earnings—such as those made after age 59½ and at least five years after the first contribution—are also tax-free.

Adjusting for Extended Lifespans

Longer life expectancies mean retirement savings need to last decades. Advances in healthcare and improved living conditions have pushed average life expectancy higher, with many retirees living well into their 80s or 90s.

Longevity risk—the chance of outliving savings—can be managed by adjusting withdrawals based on market performance and personal circumstances. Reducing withdrawals during market downturns can help preserve capital. Some retirees use annuities, which provide guaranteed income for life in exchange for an upfront investment. Fixed annuities offer stability, while variable and indexed annuities allow for potential growth linked to market performance.

Healthcare costs become more significant with age. Medicare covers many medical expenses but does not pay for extended nursing home stays or in-home assistance beyond limited circumstances. Long-term care insurance can help offset these costs, though premiums rise with age and health conditions. Some retirees choose hybrid policies that combine life insurance with long-term care benefits.

Diversifying Asset Allocations

A well-diversified retirement portfolio balances exposure to equities, fixed income, and alternative investments, adjusting over time to align with financial goals and market conditions.

Equities historically provide higher returns than other asset classes, making them important for long-term growth. Broad market index funds and exchange-traded funds (ETFs) offer diversification within the stock market, reducing company-specific risk. Sector rotation strategies, which shift exposure based on economic cycles, can further optimize returns.

Fixed income investments, including Treasury bonds, municipal bonds, and corporate debt, provide stability and predictable income. Bond ladders, which involve purchasing bonds with staggered maturities, help manage interest rate risk while maintaining liquidity. Treasury Inflation-Protected Securities (TIPS) adjust for inflation, safeguarding purchasing power. Municipal bonds offer tax-exempt interest at the federal level, and in some cases, state and local levels.

Potential Income Streams

Relying solely on savings may not be enough to sustain a comfortable retirement, making additional income sources important.

Real estate investments generate cash flow through rental income. Purchasing residential or commercial properties can provide monthly earnings, though maintenance costs, property taxes, and market fluctuations must be considered. Real estate investment trusts (REITs) allow individuals to invest in property markets without direct ownership, offering dividend income and liquidity.

Dividend-paying stocks provide regular payouts while allowing capital to grow. Companies with strong dividend histories, such as those in utilities, consumer staples, and healthcare, tend to offer reliable distributions.

Part-time work or consulting can supplement income while keeping retirees engaged in their fields. Many professionals transition into freelance roles, leveraging experience to earn without committing to full-time employment. Online platforms make it easier to monetize skills, whether through tutoring, writing, or specialized consulting. Annuities and structured payouts from pensions or deferred compensation plans can provide guaranteed income, reducing reliance on market performance.