Retirement Savings: How Much Is Enough
A new study from the Boston College Center for Retirement Research ( CRR ) 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 35.
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 67.
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 years."
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 balance.
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 retirement savings.
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.