How much should you save for retirement?

How much should you save for your retirement? There's no single right answer.

If you're the analytical type, you could use an online retirement calculator to work up a figure. In the process, you'll need to make several assumptions, such as the age when you'll retire, how much of a retirement paycheck you'll need or want, and the rate of return you'll earn on your savings.

If you're not the calculating type, you could always just guess, but most people end up guessing too low. You could also sign up for the default contribution rate in your 401(k) plan. The trouble is that with many plans the default rates are set way too low for you to save enough for retirement.

Fortunately, the Boston College Center for Retirement Research (CRR) offers some helpful tips in its brief, How Much Should People Save? If you don't have the patience or wherewithal to do your own calculations, there's a good chance that using its suggested saving amounts will work out better than simply guessing or using your plan's default contribution rate.

The CRR's most basic advice is that contributing 15 percent of pay to a 401(k) plan might work for employees who earning average wages -- if they start saving in their mid-30s and retire at age 65. This target contribution amount includes any employer-matching contribution, so if your employer contributes 5 percent of pay you'd need to contribute 10 percent of pay. These calculations rely on a number of assumptions, which I'll summarize at the end of this post.

Perhaps even more useful is a table CRR provides that shows target saving rates that vary by the age you start saving and the age you assume you'll retire. For example:

If you start saving at age 25 and you ...

  • Retire at age 62: Save 15 percent of pay
  • Retire at age 65: Save 10 percent of pay
  • Retire at age 67: Save 7 percent of pay
  • Retire at age 70: Save 4 percent of pay

If you start saving at age 35 and you ...

  • Retire at age 62: Save 24 percent of pay
  • Retire at age 65: Save 15 percent of pay
  • Retire at age 67: Save 12 percent of pay
  • Retire at age 70: Save 6 percent of pay

If you start saving at age 45 and you ...

  • Retire at age 62: Save 44 percent of pay
  • Retire at age 65: Save 27 percent of pay
  • Retire at age 67: Save 20 percent of pay
  • Retire at age 70: Save 10 percent of pay

The takeways? Start saving as soon as you can. The target saving amounts get pretty high if you wait until age 45 to start. On the other hand, don't give up in despair if you haven't started saving by age 45. If you reconcile yourself to working until age 70, you may still only need to save 10 percent of pay, not an impossible amount for many people, particularly if your employer contributes to the plan.

If you start saving at an age other than 25, 35, or 45, or if your target retirement age doesn't equal ages 62, 65, 67, or 70, you can develop your own target saving rate using these tables. For example, if you want to retire at age 65 and start saving at age 30, you could decide to save 13 percent of your pay, which is between 10 percent of pay if you'd started saving at age 25 and 15 percent of pay if you'd started saving at age 35.

Notably, the Center's calculations assume you haven't saved anything yet. But suppose you're age 35 and have already squirreled away some savings? Just to be safe, I'd use the brief's target savings rates anyway. If you don't like this answer, you'll need to use a retirement calculator that takes into account the amounts you've already saved.

If you're already in your 50s, it gets tricky if you try to use general guidelines like those developed by the CRR. Instead, you're better off using an online retirement calculator that can take your situation into account, or work with a retirement planner who can help prepare these calculations for you.

The CRR's calculations are based on a number of assumptions that may or may not apply to you, including the following:

  • You need retirement income that equals 70 percent of your pay just before retirement. If you need a higher amount of retirement income, you'll need to save more, and vice versa.
  • You've paid off your mortgage by retirement. If this isn't the case, then you'll need a higher retirement income.
  • You'll use your home equity to buy a reverse mortgage to supplement your retirement income. If you don't do this, you'll need to save more money if you still want to hit the 70 percent target retirement income, or decide to live on less than that target.
  • You'll buy a low-cost inflation-adjusted annuity with your retirement savings. If you don't buy such an annuity, you'll most likely need to save more, since an annuity usually generates the highest amount of initial retirement income compared to other methods of generating retirement income from savings.
  • You'll retire completely and won't earn any employment income after you retire. If you plan to work during your retirement years, you can save less than the target amounts.

The CRR prepared its calculations by assuming a range of salaries across different age ranges. For example, for ages 39 to 41, low income is considered to be less than $42,000, high income is greater than $81,000, and medium income is between these amounts.

While using an online retirement calculator may seem like a more precise way to determine how much to save for retirement, you'll still need to make a number of assumptions that may or may not prove to be accurate. If you're in your 20s, 30s or 40s, it may be sufficient to use the CRR guidelines; they might get you in the ballpark of saving enough to retire comfortably. Just be prepared to complete more accurate calculations when you reach your 50s and possibly have to make some mid-course adjustments.

As you can see, determining how much to save for retirement is, at best, an educated guess. Still not sure what to do? Then try using my "Retirement Savings Menu" -- it's a visual take on the amount you need to save for the retirement you want.

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    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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