Successful Retirement Savers Start Early, Save Much

February 1, 2007 ( - A new Congressional Research Service (CRS) report puts some data behind a basic retirement savings adage: the earlier you start, the more you save and the more generous market return you enjoy, the larger nest egg you will end up with.

In their CRS report, “Retirement Savings: How Much Will Workers Have When They Retire?”,authors Patrick Purcell and Debra Whitman used Monte Carlo methods to pinpoint several savings scenarios.

For example, Purcell and Whitman found that a married-couple household contributing 8% of pay annually for 30 years from age 35 to a retirement plan invested in a stocks and bonds mix would end up with $468,000 (in 2004 dollars) by age 65. Returns stayed at the median over the 30 years in that scenario, the authors said.

However, given the probability that market returns over three decades could vary significantly, the report acknowledges a 5% chance that the couple would have $961,000 or more and a similar probability that the couple would have $214,000 or less.

If the hypothetical couple bumps its deferral to 10% over 30 years, the household could expect to accumulate $594,000, with a 90% probability that account would total between $301,000 and $1.2 million. Finally. saving 8% of pay over 40 years, the household could expect to accumulate $844,000, with a 90% chance that the account would end up somewhere between $370,000 and $2 million.

“Starting to save while young and doing so consistently every year is perhaps the single most effective way to assure that one reaches retirement with adequate savings,” the authors wrote.

For a household with median annual earnings, a 6% percent deferral will, at the median likely rate of return, grow over 40 years to an amount that, if converted to an annuity, would replace more than half of the household’s average pre-retirement earnings, according to the study. At a 10% contribution rate, the annuity value of the account would replace more than 90% of the household’s pre-retirement earnings, assuming rates of return are at the median.

The whole issue of how much a worker’s retirement savings investment will generate is critical to understanding when figuring out a savings strategy, Purcell and Whitman asserted.

“This variability in rates of return is something over which workers have no control, and which will inevitably lead to some uncertainty in retirement planning,” the authors wrote. “While it may be easier for workers to focus on what they are likely to accumulate in their retirement accounts ‘on average,’ ignoring the variability of investment rates of return could lead to poor decisions that might be avoided if workers were better informed about the way that variability in investment rates of return can affect their retirement savings over time.”