How Much Should You Be Saving for Retirement?

How much should you save for a secure retirement?

This is one of the major concerns facing Americans whose financial futures are uncertain due to the prolonged economic downturn, continued high unemployment and savings diminished and in many cases devastated by the 2008 economic collapse. A recent report for the Center for Retirement Research of Boston College calculates rates for people who start saving for retirement at the ages of 25, 35 and 45, respectively. The take-away: Don’t delay.

People need less than their full pre-retirement income to maintain their standard of living once they retire, the CRR report states. Individuals pay less in taxes, no longer contribute to Social Security and Medicare, and many have been able to pay off their mortgage before they retire or shortly thereafter.

The report calculates how much an individual would have to save to end up with an 80 percent replacement rate, the amount it is estimated households with earnings at $50,000 and over would need to maintain a pre-retirement level on consumption (as calculated by the RETIRE Project at Georgia State University). These calculations assume a rate of return on assets of 4 percent

A person who starts saving at 25 would need to save 22 percent of their pay to retire at 62. They would need to save 15 percent to retire at 65, 12 percent to retire at 67, and 7 percent to retire at 70.

Wait until you’re 35, the CRR report calculates, and you would need to save 35 percent of pay to retire at age 62, 24 percent to retire at 65, 18 percent to retire at 67, and 11 percent to retire at 70.

The expression “good things come to those who wait” does not apply to saving for retirement. Those who wait until their 45 to start saving and they would need to save 65 percent of their pay to retire at 62, 41 percent to retire at 65, 31 percent to retire at 67, and 18 percent to retire at 70.

The report concludes: “Starting early and working longer are far more effective levers for gaining a secure retirement than earning a higher return…given the greater risk that comes from attempting to earn that higher return.”