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Are you saving enough salary?

By Jennie L. Phipps · Bankrate.com
Thursday, June 14, 2012
Posted: 4 pm ET

Are you on track to save your final salary multiplied by 11?

That's the amount employee benefits consultant Aon Hewitt estimates you'll need to retire -- in addition to what you'll get from Social Security.

Be prepared for a whopping number. If you make $50,000 the year before you take retirement, over the course of your work life, you'll have to have saved $550,000 to meet this standard. If you and your spouse earn $100,000, this formula says you better be on track to save $1.1 million.

Unlike some retirement planning calculators, this yardstick is easy to understand, but there are some factors you should take into account.

  • If you will receive a defined benefit pension that is defined as a monthly amount rather than a lump sum, ask your human resources department to help you calculate what the lump might be, then subtract it from your savings goal.
  • If you inherited your father's mansion or your auntie's art collection, you can subtract their value  -- if you plan to part with them. Your own modest home is a different story -- you have to live somewhere.

This number assumes you'll need just as much money after you retire as before. Rob Reiskytl, leader of retirement plan strategy and design at Aon Hewitt, acknowledges that some people live on lots less, but says, "We don't want to make that assumption. If you want to downsize, then you can aim for a smaller number. But that's a subjective measure, and we don't go there," Reiskytl says.

Aon Hewitt analyzed the projected savings levels at retirement of more than 2.2 million employees at 78 large U.S. companies. The analysis showed that employees who rely solely on a defined contribution plan to fund their retirement were, on average, saving only enough to have 7.2 times their final annual salary at retirement. Meanwhile, employees who were lucky enough to have an old-fashioned defined benefit pension plan were on track to save 8.8 times their final pay. Overall, less than 30 percent of employees are currently on track to save 11 times final salary.

What can you do about it? Save, save and save some more. Maybe get lucky and win the lottery. And if you save too much? That's a great problem to have and one most of us won't have to worry about.

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