Another Crack at “The Number”

When it comes to saving for retirement, inquiring minds always want to know: how much do I need to have saved up by the day I retire to enjoy a financially secure retirement? There are calculators on the internet that generate these estimates, there are entire books written on the subject (such as The Number), and there are various rules of thumb. In 2010 Hewitt Associates released a study entitled Retirement Income Adequacy at Large Companies: The Real Deal. This study looked at about 2.1 million employees in large companies to see how prepared these American workers were for retirement.

The results, while not terrible, show we still have some room for improvement. Interestingly, the study produced a new “rule of thumb” for savings: at retirement, the average worker’s goal is to have 15.7 times their final pay. Just to keep the numbers simple, for every $10,000 of earnings (in final pay), you need $157,000 in savings at retirement. So if your final pay, for instance, is $50,000, you should have roughly $785,000 in retirement savings when you retire.

Based on current saving patterns, the Hewitt study shows that “full career contributors” (workers who have always contributed to their employer’s retirement plan, or who always have been covered by a retirement plan at work) are on track to save 85% of the goal. The study assumes the worker participates in a defined contribution plan (like a 401(k) plan), a defined benefit plan (aka a pension plan), and/or Social Security. It also projects retiree medical costs to make up 20% of a retiree’s financial needs.

When you look at all employees (those who participate in their employer’s retirement plan and those who don’t, for whatever reason), the numbers are worse: only about 68% are on track to meet the 15.7 times-final-pay goal. Employees who have only a defined contribution plan and Social Security are projected to save only about 74% of the goal. And what about those workers who don’t contribute to any type of retirement plan? Not surprisingly, they are on track to save only 43% of the goal, largely due to Social Security income alone.

The study also identified the impact of the timing of the retirement decision. Early retirement (by age 62 at the latest) increased the average worker’s shortfall, largely due to fewer years of saving and increased medical expenses before Medicare coverage kicks in at age 65. The study projects only 65% of retirement needs will be met when a worker chooses early retirement.

On the other hand, later retirement (age 67 or older) increases a worker’s retirement income adequacy. As you might expect, retiring later means a worker has more years of saving, increased Social Security benefits, and simply fewer years of life expenses. Later retirement can result in a whopping 98% of an average worker’s retirement needs being met. So if you can work just another 5 years or so (past age 62), you can significantly enhance your retirement outlook.

To improve your overall retirement readiness, there are several steps you can take. For starters, you can work longer. Saving a higher percentage of income also yields positive results, as does investing efficiently (take advantage of any employer matching money in your retirement plan at work, use low-cost investment choices when possible, etc.). The study also suggests avoiding loans and withdrawals from your employer’s retirement plan, and rolling over your entire retirement plan benefits when you change jobs (rather than cashing out your account).

Have you given any thought to your number for retirement?

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About Mike Wilson

Michael L. Wilson, MBA, CFP®, CRC®, is the owner of Integrity Financial Planning. Prior to founding Integrity in 1998, he worked for two years as a faculty member at the College for Financial Planning in Denver, training other financial advisors. Mike has 10 years of experience in the mutual fund industry, having worked with Fidelity Investments and Invesco Mutual Funds. He holds an MBA in Finance from Baylor University. Learn more about his work at www.integrityplanner.com.
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