Savings rates for a secure retirement
By Barbara Mlotek Whelehan • Bankrate.com

American workers 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:

• Save enough to benefit from a full company match in 401(k) plans. • Set aside 10 percent. • Save 15 percent of our pretax salary, says CFP Christine Fahlund at T. Rowe Price. • If we delay saving until late in life, save 25 percent, says Fahlund. • Save 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.

The authors 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.

The 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 for life.

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.