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Plan for a secure retirement

By Barbara Whelehan ·
Friday, November 4, 2011
Posted: 2 pm ET

You've heard the serenity prayer, where the supplicant beseeches a higher power for the serenity to accept the things that cannot be changed, courage to change the things that can be changed and wisdom to know the difference.

When applied to retirement planning, we really don't have control over stock market moves, the future of Social Security or fund options in our workplace retirement plan -- unless, in this last instance, we successfully petition the H.R. department for change.

Among the things we can control, in most cases, are how much we save, the age at which we begin to save and the age at which we choose to retire.

What we control matters most

A new study from the Center for Retirement Research at Boston College concludes that retirement security depends more on the things we can control as opposed to such things as investment returns. In fact, the authors conclude that "Starting early and working longer are far more effective levers for gaining a secure retirement than earning a higher return."

The researchers go a step further by providing the savings rates required for retirement security. The tables below show what percentage of your income you should save, depending on if you begin saving at age 25, 35 or 45, and also on your expected retirement age. For instance, if you earn about $43,100 and you're 25 years old, you should save somewhere between 7 percent and 22 percent of your income, depending on whether you want to retire at age 62 or 70. The savings rates are much higher if you wait until age 35 or 45 to get started. (Note to young people in their 20s: Get started now, and, as a motivator, instead of thinking about retirement, think about getting rich.)

The tables show savings rates based on low, medium and high wages. Notice that, in all cases, you need to save an unrealistically high percentage of your income if you want to retire at age 62 -- particularly if you wait until age 35 or 45 to get going. Also, note that low earners don't need to save as much percentagewise because Social Security replaces a higher percentage of their incomes than it does for high earners. For example, low earners retiring at age 65 will get nearly half their income replaced, while maximum wage earners (defined in the study as those earning $106,800 in 2010) will get less than a quarter of their income replaced by Social Security.

How much to save for a secure retirement
Saving rate required for a medium earner ($43,084 in 2010) to attain an 80 percent replacement rate with a 4 percent rate of return
Retire at: Start Saving at:
25 35 45
62 22% 35% 65%
65 15% 24% 41%
67 12% 18% 31%
70 7% 11% 18%
Source: Authors' estimates.
Saving rate required for a low earner ($19,388 in 2010) to attain an 80 percent replacement rate with a 4 percent rate of return
Retire at: Start Saving at:
25 35 45
62 18% 28% 52%
65 11% 17% 30%
67 8% 12% 20%
70 3% 4% 7%
Source: Authors' estimates.
Saving rate required for a maximum earner ($106,800 in 2010) to attain an 80-percent replacement rate with a 4 percent rate of return
Retire at: Start Saving at:
25 35 45
62 26% 42% 77%
65 19% 30% 53%
67 16% 25% 42%
70 12% 17% 29%
Source: Authors' estimates. Tables courtesy of Center for Retirement Research at Boston College.

Assumptions in the study

The authors assume that:

1)      Social Security will still be around many years into the future to replace income at the same levels it does today;

2)      that retirement savers will be able to earn between 1 percent and 7 percent on their investments (the figures in the tables assume 4 percent returns), and

3)      that we will need to replace 80 percent of our pre-retirement income to maintain our standard of living in retirement.

Of course, the study also assumes access to a workplace plan. Roughly half of Americans don't have access to one, so they'll have to either convince their employer to adopt one or, if they're self-employed, adopt one of their own. Or, of course, they can also save in IRAs as well as taxable accounts.

In an article published yesterday on, Roger Nusbaum says it's faulty to assume it's necessary to replace 80 percent of your pre-retirement income. He suggests taking a close look at expenses because many of them could be cut back considerably in retirement.

I agree that how much we spend in retirement is one of those things that's largely within the realm of our control. And an 80 percent replacement rate is a tough goal to make using the savings rates in this study, particularly if you're no longer 25.

But people who are 50 and older -- take heart. There's another study that offers target savings rates for income replacement rates ranging from 30 percent to 100 percent. Check out the study I profiled last week. It's a little more doable and will get you to age 100, unless we encounter a disastrous market unlike any we've ever seen before.

But that would be something beyond our control.


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November 08, 2011 at 10:33 am

With so many aspects of retirement not under the individual’s control, it is even more important that individuals take the reins of aspects they do control, such as their individual retirement plan and contribution amounts.

November 08, 2011 at 10:15 am

You need to recompute your figures for other alternatives, for example, 0% return on investments and 4% inflation. Readers need to see what more realistic future projections do to the savings rates.

November 05, 2011 at 9:58 am

I think we need to take a closer look at the realistic realm of do we need 80% for the replacement of income. If you look at the tables the majority of people need to save more than 20% in order to get to their retirement goal. That means they are already living on less than 80%. Now we need to add in some costs that may be associated with loss of health care coverage and things of that nature as well. When it comes to retirement planning it isn't simply about savings, it also includes a little careful planning to have debts and other major expenses paid off prior to retirement so that we can live on less than 80%.