Required Retirement Savings Rate Depends on Age and Income


Saving 15% of income for retirement is a common rule of a thumb. The actual number depends on the amount of replacement income needed, when the worker starts saving for retirement and when he or she plans to retire, according to the Center for Retirement Research at Boston College.

The Federal Reserve’s National Retirement Risk Index (NRRI) assumes that an average replacement rate of 73% of annual income for all households is needed in retirement. The rate ranges from 80% for low-income households to 67% for high-income households. The middle-class replacement rate of 71% factors in a 41% contribution from Social Security.

The Center for Retirement Research says low-income households should save 11%, while high-income households should save 16%. The rates include an employer match to retirement savings. Built into these savings rates is a 4% real (inflation-adjusted) return and the assumption of an inflation-indexed annuity being purchased at retirement.

Age and retirement dates also play big roles. Workers who start saving in their mid-30s can get away with setting aside about 6% of their income if they plan to work until age 70. The targeted savings rate jumps to 24% if retirement at age 62 is desired instead. In contrast, a 45-year old person would need to save 10% to retire at age 70 and 44% to retire at age 62.

In terms of absolute dollars, $538,000 in retirement savings is needed for an individual planning to retire at age 65 in 2040. This calculation assumes Social Security will replace 36% of the person’s final inflation-adjusted earnings. Using a 70% income replacement rate, retirement savings will need to compensate for the additional 34% of cash flow needs.

The Center for Retirement Research advises people in their 50s with savings shortfalls to postpone retirement. A 29% to 30% increase in annual savings rates is required for middle- and high-income workers who hope to retire at age 65 but face shortfalls in savings. The study’s authors say a more realistic and better strategy is to work longer and reduce current and future consumption.

This article originally appeared in the September 2014 issue of the AAII Journal. Source: “How Much Should People Save?,” Alicia Munnell, Anthony Webb and Wenliang Hou, Center for Retirement Research Brief, July 2014, Number 14-11.


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