When completing my Master’s degree at Texas A&M, we had an outstanding professor whose favorite axiom was “When you make more money you are simply broke at a higher level.” There was a lot of truth in that statement, but unfortunately, most Americans will not get any raises when they retire as they have not saved enough. So how much do you need to save to retire at the same standard of living?
The answer depends on which Web Site you visit, and having looked I believe there are as many different answers as there are Web Sites. One recent study from the Human Resource Firm Aon Hewitt concludes:
- An individual needs 11 times their current salary in savings to retire at age 65 (and that should have been accumulated during their entire career)
- The first year of retirement will require 85 percent of the prior year’s salary
- Most individuals that saved their entire careers will have just 8.8 times their annual salary in savings, leaving them short of savings
How much should a person save to get to Aon’s target? The study notes that a 25 year old working for a company with a defined contribution plan (pension) needs to save approximately an amount equal to 15 percent of their salary per year (from both their own savings and the employer’s contribution) to reach this level. If the individual starts saving at the age of 30, then the total annual contribution to savings jumps to 19 percent.
In the study, just one in ten of the people surveyed under the age of 30 were contributing 15 percent or more (combined from them and their employer).
How long are people expected to live? The Aon Hewitt study assumed males would live until they were 87 and females until 88.
What are some possibilities for individuals that are behind the savings curve?
- Retire later – retiring two years later at age 67 raises the adequate savings level from 29 percent (those retiring at the age of 65) to almost 50 percent of individuals
- Save more
- Manage your money well both pre- and post-retirement
And what can employer’s do?
- Automatic enrollment in a retirement plan significantly increases the percent of participants on-track to reach the 11 times salary savings by 15 percent
- Supply expert help to employees to manage their plans. Aon’s study found that employee’s that took advantage of expert assistance increased their return by 2 to 3 percent. A 1 percent increase in return in the future is equal to two times their current savings in annual salary
While the 11 times sound excessive, I know of many people that simply did not save enough and unfortunately will have to work until they pass away.