How much do you need to save for retirement?

Lisa Scherzer

How much do you need to save for a comfortable retirement?

The answer is “it depends.” (If you don’t like that, try “as much as possible.”)

The problem with retirement planning is that so much is unknowable – no one number or percentage rate quite cuts it  – and any formula depends on a mountain of factors, including: your savings rate, how many years of work remain, the rate of return on your investments, and how long you live.

We took a look at some retirement planning strategies to help savers figure out if they’re on track. As with most tools and calculators, these are guides – not hard and fast decrees.

The “16.6% rule”

One study by Wade Pfau, CFA and professor of retirement income at The American College in Bryn Mawr, Pa., analyzes what he calls “safe savings rates,” which is how much of your income you need to save per year to fund your retirement. 

What he's found is that saving 16.6% of your salary every year is the safest minimum rate you can use to finance a comfortable retirement.

This number assumes the baseline retirement saver wants to replace 50% of his pre-retirement income (which does not include Social Security benefits here); will spend 30 years saving and investing and will spend 30 years in retirement. It also assumes his investment allocation will remain steady at about 60% stocks and 40% fixed income. (Pfau used historical market data going back to 1871 and targeted a 4% withdrawal rate in retirement.)

Pfau includes variations for shorter and longer saving and retirement phases. See the table below for specific details.

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Given Pfau’s assumptions, a worker who’s 35, making $80,000, and aiming to retire at 65, should save at least $13,296 a year.

Of course, bumping the replacement rate to 70% of income leads to significant increases in minimum savings rates.

There are additional caveats Pfau appends to his conclusions. For instance, he excluded portfolio management fees to be consistent with most existing research. Introducing a fee of 1% of assets deducted at the end of each year would increase the baseline safe savings rate considerably, from 16.6% to around 22%.

Give or take a couple percentage points…

T. Rowe Price offers a simpler guideline. “If someone were to ask me ‘how much should I save for retirement?’ our answer is at least 15% of your salary,” says Stuart Ritter, a vice president and certified financial planner at T. Rowe. (This assumes you want to replace 75% of your pre-retirement income -- about 50% from investments and 25% from Social Security benefits.) This is “a reasonable number for most people in most situations,” he says. But you can refine that number further by factoring in your age and how much you’ve already saved. For example, if you’re 45, making $80,000 and have already saved twice that amount, you should aim to save 22% of your salary. (See table below.)

8X salary, 11X salary

Fidelity Investments tries to simplify matters even more. The mutual fund company suggests people save at least eight times their ending salary to ensure they won’t outlive their savings during a 25-year retirement. (Fidelity assumes workers start saving at age 25, aim to retire at 67, live until 92, and want to replace 85% of preretirement income, including Social Security.)

By age 35, Fidelity suggests you should have saved 1X your current salary, then 3X by 45, and 5X by 55. So using the previous T. Rowe example, a 45-year-old earning $80,000 should have $240,000 tucked away.

A 2012 study done by Aon Hewitt, however, says you need 11 times your final working salary to retire at 65. According to Aon’s report, a 25-year-old with an employer-sponsored 401(k) plan “needs a total annual contribution (employee plus employer) of approximately 15% of pay to retire at 65 with adequate resources.” And if an employee waits until age 30 to start socking money away, the total annual contribution needed climbs to 19% of pay.

No rules

Michael Kitces, partner and director of research at Pinnacle Advisory Group in Maryland, says the save-a-percentage-of-income approach is flawed. The focus, instead, should be on how much you’re spending. “The better approach is to take control of spending and try to slow its rate of increase… It's crucial to keep future spending from rising as fast as future income,” he says.

No matter which benchmark you rely on to guide your own retirement savings path, they all underscore one key message, as Pfau says in his research: “Starting to save early and consistently for retirement at a reasonable savings rate will provide the best chance to meet retirement expenditure goals.”

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