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Are you on track to retire?

By Barbara Whelehan ·
Friday, September 9, 2011
Posted: 3 pm ET

We're always getting barraged by bad news about how ill-prepared we are for retirement as a nation. Well, here's some relatively good news: Americans are on track to replace roughly 64 percent of their incomes in retirement.

That takes into account current and future savings as well as Social Security, according to chartered financial analyst W. Van Harlow, Ph.D., director of Investment Retirement Solutions at Putnam Investments, who earlier this week spoke at a webinar hosted by

After the webcast, I asked Van Harlow how his findings square with those of the Employee Benefit Research Institute, or EBRI, which found that roughly two-thirds of American workers report total savings and investments of less than $50,000, and three-fourths have less than $100,000. How can Americans be on track to replace 64 percent of their incomes given those paltry savings levels? I asked him about his assumptions in that calculation.

"One of the things that distinguishes our results from others is that we base the analysis at the household level rather than just the individual," he says. "The 64 percent replacement estimate is for household income. The median amount of savings at the household level is $65,250. The primary reporting member of the household is 42 with a median income of $62,500 and saving $3,750 per year. So while they currently have $62,500, they have another 23 years to save and grow their assets," he says.

"If we were to do the analysis at the individual level, the results would be much different. The individual assets would only be $37,500, which is consistent with the research you quoted. However, we feel that it is important to do the analysis at the household level since that is generally the way retirement goes."

Juggling the numbers

So how can you tell if you're on track? I ran across a white paper by Principal Financial Group that can help you figure that out.

Called "When the destination is retirement: A way to help keep investors' plans on track," the white paper describes that at different phases of life, we can influence a successful retirement outcome by changing one of three variables: our savings rate, the age at which we retire and the percentage of our income at which we can live on, also called the income replacement ratio.

Advisers tell us that generally we need 85 percent of our pre-retirement income, but that all depends. We might need more, we might need less. If we have the house paid off, we may not need as much. And if we consider how much we will save on things like gas, business clothing and auto maintenance once we no longer drive to work, hey, we might be able to live on much less than 85 percent.

When you're young, Principal's white paper explains, you can change the amount you defer into your retirement account only slightly and make a big difference in the size of your nest egg in 40 years. But if you're in your 50s, upping the savings rate won't help much unless it's substantial and painful. The other things you can (mostly) control are how many years you plan to work, and how much of your income you need to replace.

Use the chart below to see if you're on track. First step is to figure out your "savings-to-income ratio" by dividing your total retirement savings by your annual income. For example, if you are 50 years old, you earn $40,000 annually, and you have saved $160,000, your savings-to-income ratio is 4.0. According to the chart, if you have 15 years left to work, you should be saving 18 percent, including employer contributions, to reach your goal of achieving an 85 percent income replacement ratio. Or you can contribute 7 percent and work until age 70. Another alternative: You can achieve a 70 percent income replacement ratio by deferring only 1 percent.

Necessary savings rates
Current savings-to-income ratio Remaining working years
20 years 15 years 10 years 5 years
85% income replacement ratio 9.0 0% 0% 0% 0%
8.0 0% 0% 0% 17%
7.0 0% 0% 3% 38%
6.0 0% 0% 15% 60%
5.0 0% 9% 27% 81%
4.0 7% 18% 39% N/A
70% income replacement ratio 5.0 0% 0% 0% 20%
4.0 0% 1% 11% 42%
3.0 3% 9% 23% 63%
2.0 10% 18% 35% 85%
1.0 17% 27% 46% N/A
Source: Principal Financial Group

These are rough calculations intended for advisers to help their clients do a quick retirement planning checkup. They then should tailor the results to the needs of their clients.

Going back to Putnam's 64 percent replacement ratio, while that suggests we're not in dire straits, we shouldn't be complacent either. Says Van Harlow: "As we pointed out in the webcast, 64 percent is a good score, but given health care costs, etc., households should be targeting a higher number."

Check back at Monday, Sept. 12, when we'll be unveiling a special package called "Managing Your Income in Retirement."

Follow me on Twitter: BWhelehan

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