are in a tough spot. We have the enormous responsibility of funding our retirements
without a clear notion of how much to save. That's akin to setting sail on the
high seas without the benefit of a compass.
Oh sure, we've
all heard ballpark savings rates before.
These rough rules of thumb have value since we might
otherwise forget to save altogether. But the advice is somewhat scattered and
not applicable to everyone's particular situation.
New savings rates
The April issue of the "Journal of
Financial Planning" features a
study that may offer the best direction to date for American workers to follow.
Its savings rate recommendations are pegged to age and income levels, and take
accumulated retirement savings into consideration.
|Rough rules of thumb:
enough to benefit from a full company
match in 401(k) plans.
aside 10 percent.
15 percent of our pretax salary,
says CFP Christine Fahlund at T.
we delay saving until late in life,
save 25 percent, says Fahlund.
the percentage that represents half
our age, says CFP Robert Pagliarini.
So if you're 20, save 10 percent;
if you're 40, 20 percent.
spent a couple of years on the study, setting guidelines that would have widespread
application. "Our study is based on Monte Carlo simulations, explicitly making
assumptions about replacing 80 percent of net pre-retirement income," says
Roger Ibbotson, Ph.D., one of the study's five authors. "These are answers
that actually have been mathematically determined as to what would work for the
largest number of people."
Net pre-retirement income refers
to your gross salary minus the amount you're putting away for retirement. That
stands to reason: After all, you're managing to live on your earnings minus retirement
savings right now, and you won't be saving for retirement after you've retired.
This takes some of the pressure off, since it substantially reduces how much you
need to save.
The study calculates how much
you'll need at age 65, in addition to Social
Security income, to maintain your standard
of living. It simplifies matters by assuming
full Social Security benefits are available
at age 65. However, the study's authors urge
readers to wait in reality until full retirement
age -- between 66 and 67 for boomers -- to
get the full benefit.
study assumes that pre-retirement earnings and post-retirement cash flow needs
will grow in line with inflation at 2.5 percent annually. Finally, the authors
assume that individuals at the time of retirement will use their accumulated savings
to purchase inflation-indexed lifetime fixed payout annuities that guarantee income
So what's the correct savings rate? Well, it depends
on your particular situation -- which is, of course, the whole idea. And since
your situation can change at any time -- maybe you'll get a much larger raise
than 2.5 percent? -- you need to go back and refigure your savings rate based
on your new situation.