This paper is designed to help people understand the need to start saving for retirement early and the need to save a significant amount each year to achieve a satisfactory standard of living during retirement. Advice on saving for retirement often starts with an advisor asking an individual to project their retirement needs as of a planned retirement date. The advisor then creates a savings program designed to accumulate enough funds to produce that desired level of income, with such income indexed for inflation in most instances. This type of individualized projection can be very helpful for persons close to retirement. However, it is not that helpful for persons many years from retirement who are trying to decide on a long term retirement savings rate. Naturally there are many unpredictable events that may occur which makes it difficult for a young person to make a projection of this kind, including factoring the lifestyle that a family will develop and want to maintain. This lifestyle will normally be a function of one’s career successes and future earnings levels.
This paper develops a savings rate for retirement a little differently from the model above, so that persons many years from retirement can start a systematic savings program for retirement. This is done by using a set of consistent assumptions to calculate the savings rate needed to achieve a projected income level during retirement that is equal to 70% of salary in the year just before retirement. Many pension experts believe that a retirement income level of at least 70% of a person’s final salary is a good target level for people starting to save for retirement, especially for persons with moderate incomes and moderate standards of living. As people get closer to retirement (perhaps, within 10 years of retirement), they can perform the more personalized calculation of projecting actual retirement needs and expenses. In the meantime, they will have been saving for retirement and should be in a much better position to achieve a satisfactory standard of living in retirement. They should also be more pleased with the results of their individualized retirement projection, as they approach retirement, because of their accumulated savings to date.
The paper concludes that a person start to save for retirement at an early age, and not later than age 35. A person, who starts to save for retirement at age 35, who wants to retire at age 65, and is earning about $40,000 per year, should save about 15% of salary before taxes each year for retirement and should not interrupt this year-to-year saving unless absolutely necessary.
A summary article of this research paper, titled How Much Saving Is Sufficient for Retirement? appeared in the Autumn 2003 issue of Quarterly.
