How much should you save?

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How much money to save for retirement is a moving target, but making a basic calculation is an exercise that is worth doing — especially if you have time to commit to a savings plan and make up any short falls.

Russell Investments, a Seattle-based global consulting and asset management firm, devised a formula primarily for its agents and investment advisers to help clients figure out a 401(k) savings percentage. As Josh Cohen, a defined contribution practice leader, says, “Oftentimes you see surveys about various savings rates and they vary. So what should we be aiming for? I don’t think a lot of people heave clear idea. This is an effort to start that conversation.”

Russell advises calculating your Target Replacement Income, or TRI. Start with the percentage of salary that you will need to replace with savings during retirement. This is a big retirement planning question. Some advisers say 85 percent or even 100 percent, but others believe that 60 percent is plenty, especially if you have paid off your mortgage and don’t have a lot of other debt.

Once you’ve decided on a replacement rate, the target replacement income is easy to figure out –you take the Target Replace Rate and multiply it by 30 percent. Or in Russell’s parlance, TRI30.

60% x 30% = 18%

In other words, to get the amount that you should save annually, you take the replace rate, in this case 60 percent, and multiply it by 30 percent, which gives you 18 percent. This is the percentage of your income, including the employer contribution to your 401(k), that you’ll need to save every year for 40 years to be 90 percent sure that you’ll have enough savings to replace 60 percent of your pre-retirement income — when you finally retire.

Remember, that rate is a blended one that includes the amount that your employer contributes. Also, it doesn’t take into account Social Security, nor defined benefit pensions or money that comes from elsewhere — such as a gift from grandma or an expected bonus. If you think you need 60 percent but believe Social Security will replace 30 percent, then the calculation is:

30% x 30% = 9%

A fairly modest retirement savings rate, especially, if your employer is kicking in.

A link to a fuller explanation of this calculation can be found on Russell’s Institutional website: I think if you have a long way to go before retirement, this is an excellent tool to determine whether you’re on the right path.