How Much You Need to Save for Retirement

How much money does a typical worker need to save every month in order to have a reasonable chance of financing a secure retirement? New analysis from the Center for Retirement Research at Boston College (CRR) came up with a broad overview of the rates needed by different age groups and income levels.

To estimate necessary savings rates, the researchers first sought to determine what level of retirement income would provide an equivalent standard of living to a retiree's final year of pre-retirement income. After they took account of changes in various tax burdens, commuting expenses, housing costs and other factors, they estimated that a single worker earning $20,000 prior to retirement (the CRR study's "low" income) would need about 88% or $17,600 during retirement, including Social Security benefits calculated according to the current formula. Someone earning $50,000 ("medium" income) would need about 90% or $40,000 after retirement, and someone earning $90,000 ("high" income) would need about 81% or $73,000. Both of those estimates also assume the current levels of Social Security benefits. 

Here's how the projected savings rates work out for a consumer at each level, assuming a normal retirement age (67) and an average annual investment return of 4% after inflation is taken into account:

A low income retirement saver would need to set aside 8% of income each years starting at age 25. If the same person were to wait until age 35 to start, the rate would go up to 12% of their income per year. If the same person were to wait until age 45, the necessary savings rate would rise to 20% per year.

A medium income retirement saver starting at age 25 would need to set aside 12% per year. Waiting to start until age 35 to start the savings boosts the rate to 18%. Waiting until 45 pushes it to 31%.

A high earnings saver would have to set aside 16% per year starting at age 25. If he or she waited to start until age 35, the rate would increase to 25%. Waiting until 45 causes the required savings rate to rise to 42%.

Keep in mind that if Social Security were to be cut back, savings rates would have to be increased proportionately to cover any reductions in anticipated benefits. Also keep in mind that if real investment returns average higher than 4% in the future, the amount of savings can be reduced somewhat. But the researchers noted that "...the effect of rate of return on required saving rates, for workers at all earning levels, is smaller than the effect of the age at which saving starts and, especially, the age of retirement." In other words, start your savings program earlier and then working longer could have the greatest impacts on your financial readiness for retirement.

Three-Step Retirement Plan Tune-Up

Even if your personal outlook hasn't changed, keep in mind that uneven returns provided by different investments may have caused your portfolio to shift from your intended asset allocation.
Conducting an annual review of your retirement goals and strategy is a great way to help ensure that your plans for your financial future remain realistic and on track. With that in mind,  taking the three easy steps outlined below will help you conduct your retirement tune-up.

Step 1: Review your retirement goals
Your first step should be to review your retirement savings goals and assess whether anything significant has occurred during the past year that might affect either your outlook for retirement or your current strategies to prepare for it. For example, have you decided to change the date when you'll retire? Or have you experienced any new milestones such as getting married, divorced, or having a child? Any of these events may affect how much you will want to save to fund the retirement you envision.

Step 2: Take a fresh look at your retirement strategy
Your portfolio's specific mix of stocks, bonds, and cash, known as your asset allocation, should complement your financial goals, risk tolerance, and time horizon. If you haven't taken a fresh look at your investments in awhile, don't assume that your old asset allocation is still appropriate for your current needs. Even if your personal outlook hasn't changed, keep in mind that uneven returns provided by different investments may have caused your portfolio to shift from your intended asset allocation. Given the market volatility that has occurred since 2007, if you have not reviewed your asset allocation since that time, there may be a good chance that uneven returns have caused it to change. If your asset allocation needs to be rebalanced, now may be the time for action.

Step 3: Consider saving more
None of us know what the future might hold. A good way to improve the odds that you have saved enough for retirement is to save more, no matter how prepared you may already be. If you have not already done so, consider funding an IRA. To find funding limits for your IRA account, more information can be obtained at www.irs.gov. If you participate in a workplace-sponsored retirement plan -- such as a 401(k), 403(b), or 457 -- you can contribute up to $16,500 for 2011. Those aged 50 and over can add up to another $5,500. If you are eligible for a plan at work, but haven't enrolled yet, what are you waiting for?

Conducting a retirement tune-up is always a great idea, but don't forget to consult with your financial advisor to discuss what else you can do to help achieve retirement security.