You'll Need to Save More

published 3 January 2011

Even before the onset of the worst financial crisis since the Great Depression, many individuals wondered whether they were saving enough for retirement. Frankly, many weren't. Now, post-meltdown, the question remains: Am I saving enough? If not, what can I do about it?

Start with the assumption that you will need to replace about 85% of your preretirement income from a combination of savings and Social Security. If you expect income from other sources -- perhaps a pension or part-time work -- or if you plan to pay off your mortgage before retirement, your replacement target may be lower.

Next, divide the amount you have already saved for retirement by the current income from your job. If you earn $50,000 per year, for example, and you have saved $100,000 so far, your retirement savings-to-salary ratio is 2. Compare it to the ratios below. If you're 40 years old, congratulations, you're on track for a secure retirement. But if you're 45 or older, you've got some catching up to do. Ideally, if you plan to retire at 65, your combined savings and investment earnings should equal more than ten times your final salary.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

The table assumes you are saving 13% of your gross income, including any employer contributions, and that your wages grow by 4% per year (meaning your contributions would increase along with your salary). It also assumes that Social Security will replace about 40% of your earnings. That's true if you earn about $50,000 a year, but for higher-wage earners, Social Security will replace a smaller portion of preretirement income, so you may need to save more than the target ratios suggest.

Let's say you're 30 years old, single, earn $30,000 a year and contribute 4% ($1,200) of your gross salary per year to your 401(k) plan. Your employer matches 50% of your contribution on the first 8% of salary. If you boost your deferral rate to 8%, you would double your contributions from $1,200 to $2,400 per year, but you would reduce your take-home pay by just $17 per week, assuming a combined federal, state and local tax rate of 25%. Plus, you'd capture the full company match.

Although many workers fail to contribute enough to their retirement plans to capture the full employer matching contribution, nearly 90% of respondents in a recent survey conducted by ING U.S. Retirement Services admitted that they could save more. "Americans today understand that they shoulder a greater responsibility for securing their own retirement," says Rob Leary, chief executive officer of ING Insurance U.S. "People must find ways to contribute more to their retirement accounts."

So, where do you find room in your budget to increase your savings? Consider cutting back on some luxuries, such as a daily latte or a pricey car, to fund a more comfortable retirement. Saving an extra $70 per month -- about equal to the $17-per-week reduction in take-home pay from our example -- would add more than $160,000 to your nest egg in 35 years, when you're 65, assuming an average investment return of 8% per year.