A new study from the Boston College Center for Retirement
) finds that 50% of working families won't have a big enough nest
egg to maintain their standard of living in retirement.
"People are not saving enough to generate the wealth they'll
need to maintain their standard of living in retirement," said
Alicia Munnell, director of the CRR. "We got lulled into low
savings rates in the 1990s, when the stock market had huge annual
rates of return. But we don't have those any longer."
A middle income person who wants to retire at age 65 needs to
save 15% of his preretirement income annually, starting at age
That pace of savings assumes that the retirement account earns
4% a year more than inflation.
The study also shows huge benefits come from starting your
saving and investing earlier. And the study shows a big benefit
in delaying retirement.
If that middle income person starts at age 25 instead of 10
years later, he can reach his nest egg target size by saving just
10% a year.
But someone who does not start until age 45 must sock away a
daunting 27% of income to retire at 65 or 20% to stop at age
The CRR data view someone who is 54 to 56 years old to be
middle income if he earns $45,500 to $97,500.
At ages 30 to 32, that range is $36,500 to $68,500.
Not On Track?
Patrick McClain, a partner and a founder of Hanson McClain
Advisors in Sacramento, Calif., said, "When I tell clients who
are not on track for a big enough nest egg that their
alternatives include cutting expenses in retirement or delaying
retirement, they typically delay retirement by two to five
What about that middle income person who starts saving at age
35 and needs to save 15% annually if he retires at age 65? He
only needs to save 12% a year if he waits until age 67 to retire,
according to the Boston College study. If he keeps working until
age 70, a 6% yearly savings rate will get the job done.
That's because postponement gives your retirement account
extra years to grow.
It's also because your life expectancy is shorter once you
retire. So you can get by with a smaller annuity or account
Munnell's group found that a middle income family needs 71% of
its preretirement income to maintain its standard of living after
quitting work. The household can expect 41 percentage points of
the 71% to come from Social Security.
The balance must come from the family's resources, such as
And how large must your retirement accounts be in dollars if
you withdraw, say, 4% a year?
That depends on what rate of return your accounts earn.
What's Your Number?
Fidelity Investments estimates that you'll need eight times
your final pay if you retire at 67. That will let you replace 85%
of your working income. Consulting firm Aon Hewitt says you'll
need 11 times final pay by age 65.
McClain tells clients they'll need a nest egg that's 20 to 25
times final pay. And don't overlook potentially hefty retirement
expenses like health care.