How much do you need to save for retirement?
It’s the million-dollar question that never has a precise answer, especially for young people who have decades to go before retiring. But plenty of researchers and financial advisers try to provide some guidance, even for those just starting out.
Here are their suggestions:
- Save 15 percent. A study this summer by the Center for Retirement Research at Boston College found that a 25-year-old who saved 15 percent of her salary annually could retire at age 62 and replace 70 percent of her pre-retirement income.
If you put away only 10 percent every year, you can take home the same amount of retirement income – you just have to wait until age 65 until you can finish working. (The calculations assume an average annual return of 4 percent, after inflation.)
What happens if you don’t start putting away for retirement until you’re older? As you may have guessed, you have to save more to reach the same goals. A 35-year-old with zero retirement savings would have to save 24 percent of his income to retire at 62, and 15 percent of his salary to leave the workforce at age 65.
- Include the employer match. Setting aside 10 percent to 15 percent of your income may seem like a lot of money, but the good news is those figures include any matching contributions you receive from an employer.
More than 80 percent of companies with a 401(k) or other retirement plan offer a match, according to the latest data from the Plan Sponsor Council of America, a nonprofit that works on behalf of companies offering 401(k) plans.
And the most common match formula is 50 percent of every dollar contributed, up to the first 6 percent of pay. That means if you earn $50,000 and contribute 6 percent to your 401(k), or $3,000, your employer will kick in another $1,500. Together, that adds up to a 9 percent contribution – not far off from the percentage you need to save each year.
- Make adjustments. What if you stop saving for retirement for a few years, say, because you go back to graduate school or take time off to have children?
A study by Baltimore-based mutual fund company T. Rowe Price found that a worker who had been saving 13 percent of his salary until age 35, but then stops making any retirement contributions for five years, can catch up.
To do so, though, he would have to increase his annual savings rate to 17 percent. (Older workers who take a break have to increase their contributions by considerably more because there is less time for the money to compound and grow.)
The bottom line: When it comes to retirement saving, “there’s no such thing as ‘all set,'” said William Bernstein, a financial adviser and author of several books about investing, including “If You Can: How Millennials Can Get Rich Slowly.” “Only your probability of success changes, or you have to save more or less.”
- Use calculators. Plenty of calculators are available online to help you.
The Vanguard Group, known for its low-cost index mutual funds, offers a simple version at personal.vanguard.com/us/insights/retirement (click on “set your retirement goals”). The calculator estimates how much you’ll have accumulated by age 65, as well as the amount of money you can withdraw each month.