Savings rates for a secure retirement
good for success
These savings rates have a 90 percent chance of
success, according to the authors. They performed Monte Carlo simulations, running
each combination of age, income level and savings rate through 2,000 market scenarios.
You know -- the market can go both up and down, and downward volatility can change
the best-laid plans. We're talking macaroni and cheese instead of lunch in Rome.
Altogether the authors ran more than 72 million simulations
to ensure a high probability of success with these savings rates. The portfolios
they used in their research mimic target date funds, which become more conservatively
positioned over time.
The most interesting finding of the study: "The recommended savings rate for a person starting to save at age 25 typically more than doubles if they wait until age 45 to start saving, and triples if they wait until age 55 to start," say the authors.
This is not really all that shocking. The optimal
time to start saving is when you're young and fresh out of school. The savings
rate hardly puts a crimp in a young person's lifestyle.
felt that people needed some guidelines so they have some idea as to what to save,
and particularly younger people because younger people have far more years to
plan," says Ibbotson. "The earlier they start, the more wealth they
will accumulate and it will be easier to actually meet those retirement goals."
the study notes that age 35 is not too late to start saving. Just don't wait much
longer or you'll find that the savings rate begins to look like a burdensome tax
rate, particularly at higher income levels. This is because Social Security replaces
a larger proportion of income for low- to middle-income Americans than for high
The study isn't foolproof -- mainly because we as
human beings aren't foolproof, and our lives are not predictable. For instance,
most of us generally don't achieve market returns, and many of us encounter financial
instability from time to time. If we lose our jobs we cannot save. And we don't
know if, later in life, we'll be facing high medical expenses. These down-on-your-luck
situations aren't factored into the study.
Neither are financial
windfalls, such as lottery winnings or inheritances. So the fates may intervene
to facilitate or hinder your plans, as the case may be.
at least Americans now have a good quality compass they can use to help chart
their course to a secure and comfortable retirement.