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How much should I save for retirement?

Good question. According to the “experts,” you need to save 15% of your income (including any employer contribution). This assumes you will retire at age 67. It also projects income replacement of 45%. Clearly that is insufficient, but add Social Security and if you are really lucky, a traditional pension you may have.

But let’s look at some numbers. At age 67 in 2016 with annual income of $60,000, your monthly Social Security benefit would be about $1,624 or $19,488 annually. Add $27,000 from your savings and your total replacement income of $46,488 is 77.48%. To receive the $27,000 using the 4% withdrawal rule from your retirement savings you need a total fund to start at age 67 of $675,00 (675,000 x 4% = 27,000). 

I maintain that 77% replacement income is insufficient, especially if you do not have significant savings beyond savings dedicated to retirement. In addition, if you are not debt free, especially from a mortgage, it is even a tougher road. 

Assume you do retire as illustrated above and that you are living on a gross income of $46,488. To pay all your bills each month those bills and other expenses must drop by 23%. Presumably some of that will come from no longer saving for retirement. But where will the rest come from?  Not only must you live on less, but a 77% replacement leaves little for other pleasurable spending in retirement; not to mention higher health care costs. 

There are two other big ifs to consider:

  • How will you keep up with inflation?
  • How will you pay for unanticipated expenses not part of your regular budget. REMEMBER, taking extra money from your retirement account is not a viable option. 

Mar 17, 2016 5:00 AM EDT

Everyone knows how important it is to put money away for retirement. But if you save too little, you’ll be poor later on. If you save too much, you may be denying yourself the good life today. So, how do you decide how much you should contribute to your 401(k) or IRA?

You could rely on guidelines published by such knowledgeable institutions as Fidelity Investments or the Boston College Center for Retirement Research (CRR). Both organizations suggest a contribution that’s equal to 15 percent of your pay. This amount includes any employer contributions, so if your employer adds or matches 5 percent of your pay, you would only need to put away only 10 percent of your pay.

Both Fidelity and CRR base these suggestions on four important assumptions:

You want the same standard of living in retirement as in your working years.

You start contributing in your 20s or mid-30s and save continuously until age 65 (CRR’s analyses) or 67 (Fidelity’s analyses).

You retire full time.

You earn rates of return on your savings that are representative of historical levels.

Some analysts have criticized 15 percent of pay as being too high, reasoning that retirees’ living expenses drop significantly as children move out of the house and they pay off their mortgage. True, but other life events can happen to counteract these savings, which could support an argument for higher contributions.

Here is a simple calculator for your use.


3 replies »

  1. I like Steve. But, he has it all wrong. Pay yourself first. Live below your means, always. Save up for all future needs. The right answer for almost all Americans is to save till it hurts, till it requires you to deny current wants, and even, current needs.

    The problem here is not so much figuring out how much you need to save in your 401(k)/403(b) plan to provide an adequate retirement income – IT CANNOT BE DONE. Think of all the assumptions required, including: Earnings, inflation, continued employment, current plan design is maintained indefinitely, including ability to defer, employer match, etc., interest rate at future age 65, annuity purchase rates, future tax rates, post-retirement inflation, health care costs, longevity, future Social Security benefits, etc. So, while I agree that it should never be less than 15% of earnings, 15% is no guarantee… IT IS A GUESS.

    The real problem with such suggestions – whether in the form of a needed income replacement rate, or a needed level of savings – is the concept that you should earmark specific amounts for specific needs. Most Americans still live payday to payday (67% by some estimates). So, for most Americans, it becomes a choice between saving for a home or for retirement; or more likely, spending money on current needs (food, shelter, transportation, debt service, etc.) or saving for retirement.


    • I agree. However, I never bought into the idea of living paycheck to paycheck unless you assume that includes a great deal of spending beyond the essentials. If 67% of Americans were living that frugally, nail salons, restaurants, tattoo parlors, Apple and most other businesses would be out of business. Unless, of course, my idea of what is and is not a necessity is not in tune with the times… a very likely possibility.


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