By Glenn Ruffenach
Getting a late start in saving for retirement? The percentage of your annual salary you need to set aside might be more manageable than you think – if you’re willing to spend some extra years at the office.
A new study from the Center for Retirement Research at Boston College finds that 45-year-olds with medium earnings need to save a “plausible” 18% of their annual salary to maintain their standard of living in retirement. The catch: These same individuals probably need to work until age 70.
The study, “How Much to Save for a Secure Retirement,” is one of the best guides we’ve seen to help you identify your “number”: the required savings rate to help you sleep soundly in later life. To start, the center estimates (based on decades of research at Georgia State University) that households with annual earnings of $50,000 and over will need 80% of pre-retirement earnings to maintain the same level of consumption in retirement. That’s called a “replacement rate.”
Social Security, of course, will get you part of the way to that 80%. (For instance, a person with medium earnings, according to the study, will be able to replace about 36% of his or her pre-retirement salary at age 65 with Social Security benefits.) Thus, the question becomes: How to make up the balance?
Here, timing becomes critical. According to the center, the person who starts building a nest egg at age 25 needs to save only 7% of his or her salary to attain an 80% replacement rate at age 70. (The math assumes a 4% return on savings.) Wait until age 45, and the figures jumps to 18% — certainly not impossible, but a healthy bump from 7%.
Why age 70? Many Americans, of course, already are delaying plans to retire, given that nest eggs today are smaller than they should be. “Retiring later,” the report states, is “an extremely powerful lever.” Social Security benefits at age 70 are more than 75% higher than at age 62 (the earliest age at which most people can claim benefits). Postponing retirement gives 401(k)s and related savings plans additional years to grow. And leaving the office at 70, the report notes, “means that people have fewer years to support themselves on their accumulated retirement assets.”
Even if you’re well along in your plans for later life, share this study with your adult children – and even your grandchildren. The numbers – and the message – are simple and compelling.