Benefits April 6, 2007

Study Urges Individuals to Start Saving for Retirement No Later than 35

April 6, 2007 (PLANSPONSOR.com) - Individuals should start saving no later than at age 35, or will be in danger of facing a significant drop in lifestyle when they retire, a recent study by several Ibbotson Associates researchers suggests.
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According to the authors of the National Savings Rate Guidelines Study, those who start saving for retirement after age 35 face the challenge of needing to save at an increasingly higher rate to have enough. For example, the recommended savings rate for a person starting to save at age 25 typically more than doubles if he or she waits until age 45 to start saving and triples at age 55.

According to the study, someone making $40,000 would:

  • At a starting age of 25, have to save at a 10% rate to generate 80% income replacement for retirement and 4.6% if they wanted 60% income replacement;
  • At a starting age of 35, have to save at a 16.4% rate to generate 80% income replacement for retirement and 7.4% if they wanted 60% income replacement;
  • At a starting age of 45, have to save at a 29.4% rate to generate 80% income replacement for retirement and 13.4% if they wanted 60% income replacement;
  • At a starting age of 55, have to save at a 66.6% rate to generate 80% income replacement for retirement and 30.2% if they wanted 60% income replacement.

The study also shows that Social Security benefits have a greater impact on low-and moderate-income individuals than they do on high-income individuals because benefits are capped at certain income levels, meaning that higher-income individuals have to save more to offset the lower proportional benefits.

Accordinig to the study, workers whose income increases faster than inflation will have to save an increasing amount to “catch up” to be able to provide for the higher assumed standard of living in retirement.

The authors calculated the savings guidelines and capital needs as a percent of net pre-retirement income-pre-retirement income minus annual retirement savings. They assumed retirement cash flow would come from both Social Security and distributions from personal capital. Also, investment fees were not taken into account for these savings.

For a full copy of the study published in the Journal of Financial Planning visit http://www.fpanet.org/journal/articles/2007_Issues/jfp0407-art6.cfm .

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