What’s the Right Savings Rate for a Successful Retirement?

The “right” answer is, of course, it depends.

But the nonpartisan Employee Benefit Research Institute (EBRI) has published an analysis that, with the benefit of a full stochastic decumulation model focusing simultaneously on post-retirement investment risk, longevity risk and long-term care costs, provides clarity on the subject — and one that goes well beyond the simplistic “replacement rate” assumptions touted by many.

Not surprisingly, the earlier a person starts saving, the less they will need to put aside every year — and the longer they wait, they’ll need to save more (and sometimes a lot more) to catch up. Because of their longer longevity, women typically will need to save more than men.

The new EBRI analysis presents the required contribution rates for those starting to save at ages 25, 40 or 55. It also presents the minimum account balances required for those contributing to their plans at 4.5%, 9% and 15% of salary, and shows how much they should have saved at a particular age threshold to be “on track” for a successful retirement. For instance, the EBRI analysis finds:

• For a 25-year-old single male earning $40,000 a year and with no previous savings, a total (employee and employer combined) contribution rate of 3% of his salary until age 65 would result in a 50-50 chance of retirement income adequacy. Saving 6.4% of salary would boost his chances of success to 75%. Women that age would need more because of their longer lifespans.
• A 40-year-old male earning $40,000 and with no previous savings would need a total contribution rate of 6.5% of salary to have a 50-50 shot at a financially successful retirement. But saving 16.5% of salary improves the chances of success to 75%.
• On the other hand, a 55-year-old male making $40,000 and with no previous savings would need a total contribution rate of as much a quarter of his salary (24.5%) just to have a 50-50 chance of a successful retirement.

Using its Retirement Security Projection Model® (RSPM), EBRI calculated the savings amounts needed at different contribution rates, salary levels, and ages for both genders, for various probabilities that they not run out of money to pay for average expenses plus uninsured health care costs throughout retirement — the model’s definition of a “successful” retirement, though for simplification, the modeling currently excludes any net home equity or traditional pension income and does not factor in preretirement leakages or periods of non-participation.

Savings ‘Accounts’

For those looking to establish period savings benchmarks, the EBRI analysis says that, for a single male age 40 contributing 9% of salary:

• At $20,000 a year, he would need $14,619 already saved for just a 50% chance of retirement success; for a 90% chance, he would need to have $190,887 already in the bank.

• At $40,000 a year, he’d need a minimum balance of $47,493 in savings for a 75% chance of success, or $106,819 for a 90% chance of success.
• At $65,000 a year, he’d need just $4,616 of preexisting savings for a 90% chance of success.

EBRI notes that the numbers will vary by individual: For those who are younger and have higher savings rates, the required preexisting savings level goes down.

The full report, “How Much Needs to be Saved For Retirement After Factoring in Post-Retirement Risks: Evidence from the EBRI Retirement Security Projection Model®,” was published in the March 2015 EBRI Notes.