Setting a Retirement Savings Goal

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According to an old newsroom saying, "Dog biting man isn’t news, man biting dog is."

By that rule, studies on retirement savings are rarely news, as they invariably report that people aren’t saving enough. Still, conditions change all the time. The stock market is about 70% higher than it was 14 months ago. Does that mean Americans are better off?

Better off than we were back then, certainly. But still far from where we need to be. A new study by Hewitt Associates, the human resources consulting firm, finds the average U.S. employee still trailing the pace needed to build a satisfactory nest egg.

How big does that nest egg have to be? On average, 15.7 times one’s annual pay on the eve of retirement. If a husband and wife made $100,000, they’d need $1.57 million.

“While this estimate hasn’t worsened, meeting projected retirement needs has become a greater challenge for individuals, many of whom experienced decreases in their retirement accounts over the past two years,” Hewitt says.

“As a result, four out of five workers are still expected to fall short of meeting all their financial needs in retirement unless they take action to improve their savings habits or retire at a later age.”

If that 15.7 figure is daunting, take heart. It includes Social Security, which should provide 4.7 times final pay, leaving just 11 times pay to be made up from other sources. A few lucky workers still have traditional pension plans to make up a big part of that, but many will have to do it through a combination of ordinary investments and defined-contribution plans like 401(k)s.

Hewitt studied 84 companies with a total of 2 million employees, finding only 18% were on track to meet the 15.7 target.

An old rule of thumb says people should be OK if they save 10% of their incomes throughout their working years. But that rule dates to a time when many more workers had pensions.

Today, Hewitt says, a 25-year-old should plan on saving 11%, assuming he or she also gets 5% from an employer match in the defined-contribution plan.

About 26% of eligible employees do not contribute anything to their plans, and many studies have shown that very few employees put in the maximum allowed, $16,500 a year, or $22,000 for those 50 and older. A worker who waits until age 40 to begin contributions would have to save 17% of pay every year to meet the 15.7 goal.

Of course, much depends on how one’s investments do. But not many experts would recommend counting on stupendous investment returns like investors got in the 1990s. It would be very risky to count on more than 7% or 8% a year from a mix of stocks and bonds.

The only alternative to saving more: retiring later. Hewitt says people who retire at 67 instead of 65 require a nest egg 14.4 times final pay instead of 15.7 times. The extra two years of work allow for more savings, two more years of compounding and two years less retirement to fund.

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