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How much should Gen X and Y save for retirement?

Members of Gen X and Gen Y often ask me how much they should save for retirement. While my reply never used to be short and sweet, now I can offer a relatively simple and straightforward answer, thanks to the Center for Retirement Research at Boston College.

The Center recently released its brief, How Much to Save for a Secure Retirement, that summarizes its analyses of this complicated question. Let me quickly recap the answers, then fill in some details.

For each of the following ages at which you plan to start saving, the brief offers an estimated savings rate depending on when you plan to retire. (The results assume you're a medium wage earner, which the study identifies as someone with an annual salary of $43,084 in 2010.) Here's how the combinations work out:

If you start saving at age 25

-- Retire at 62: Save 22 percent of pay

-- Retire at 65: Save 15 percent of pay

-- Retire at 67: Save 12 percent of pay

-- Retire at 70: Save 7 percent of pay

If you start saving at age 35

-- Retire at 62: Save 35 percent of pay

-- Retire at 65: Save 24 percent of pay

-- Retire at 67: Save 18 percent of pay

-- Retire at 70: Save 11 percent of pay

If you start saving at age 45

-- Retire at 62: Save 65 percent of pay

-- Retire at 65: Save 41 percent of pay

-- Retire at 67: Save 31 percent of pay

-- Retire at 70: Save 18 percent of pay

Looking at these results, two messages come through loud and clear:

1. You need to start saving as soon as possible. If you start saving at age 45, the required percentage savings amounts become very high -- and may be unattainable for some people.

2. You should consider delaying retirement as long as possible in order to make sure you really have enough money to live on.

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But even if you've delayed putting anything into savings, the news isn't all bad: If you're in your mid 40s now, you might still be able to retire at age 70 if you can save 18 percent of pay -- not an impossible goal.

The above savings amounts also include any contributions made on your behalf by your employer, so if you receive matching contributions for retirement savings, they'll serve to reduce the amount you need to save on your own.

Now let's fill in some details. Estimating how much you'll need to save for retirement depends significantly on a number of important assumptions you must make, including these:

-- Your current salary

-- When you start saving for retirement

-- The age at which you plan to retire

-- How much retirement income you'll need to meet your spending needs

-- The expected return on your retirement savings

-- Your marital status

-- How you'll deploy your retirement savings to generate retirement income

-- How much you expect to receive from Social Security

The Boston College analyses make these assumptions:

-- You'll need a total retirement income equal to 80 percent of your current wages

-- You'll earn 4 percent real return on your investments

-- The current level of Social Security benefits will continue to be paid

-- You'll use a version of the 4 percent rule to generate retirement income from your retirement savings

-- You're single (presumably each spouse or partner in a couple should save the indicated amounts)

-- You have no pension from a defined benefit retirement plan

-- You have no savings at the age at which you start saving

While the best approach to estimate how much you should save for retirement is to use an online retirement planner, I'm OK with taking a simplified approach if you're more than 25 years away from retirement. So much can happen in your life between now and then that you may not achieve any additional accuracy by using a more refined approach.

If you're in your 20s and 30s and already have some retirement savings, I'd still use the savings amounts recommended by the Center for Retirement Research. This way, you'll have even more saved for retirement. If you're in your 40s and already have substantial retirement savings, you'll need to use an online calculator for the best way to estimate how much you should save, considering the amounts you've already accumulated. And if you start saving at ages other than 25, 35, or 45, you could use savings rates that are between the amounts shown for these ages.

The Boston College brief also contains estimates for high wage earners -- those people earning $68,934 in 2010. In this case, you should increase the required savings amounts shown above by these rough amounts:

-- 4 percent of pay if you start saving at age 25

-- 7 percent of pay if you start saving at age 35

-- 11 percent of pay if you start saving at age 45

Here's more smart advice: Start your 2012 New Year's resolutions early by bumping up your contributions to your 401(k) plan now. By putting more aside today, you'll thank yourself when you reach your 60s and see just how much those dollars have added up to!

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