Some experts say that you should save approximately fifteen percent of your salary each year in order to lock in a secure retirement. This percentage would include all savings such as company matched funds from your employer.1 According to a study done by the Center for Retirement Research, “…a saving rate of about 15 percent of income would be sufficient to achieve retirement targets.”2 That being said, no single percentage is going to be right for every person. There are a number of factors to consider when deciding what percentage works best for you.
How early you start saving will significantly impact what percentage of your salary you’ll need to put away. If you’re in your twenties, and stick to a sound savings regimen, then fifteen percent (or less) may be enough to achieve a comfortable retirement. When you start saving from a young age, your money has more time to grow and benefit from compounding returns. A recent article gave the following scenario to demonstrate how this works.1
“For example, if you’re 25, earn $40,000 a year, get 2% annual raises and save 15% of salary year in and year out, you’ll accumulate a nest egg of just over $1.2 million by age 65, assuming a 6% annual return. If, on the other hand, you put off saving until age 30, you would need to sock away nearly 20% of salary to end up with the same size nest egg, assuming the same 6% rate of return and 2% pay increases. The longer it takes you to get started, the more your savings rate rises. Wait too long and the savings burden can become onerous.”1
Other aspects to consider include the age you plan to retire, how long you live, and your retirement lifestyle. Since people are living longer these days, your retirement could easily last twenty to thirty years. It’s also a good idea to anticipate the rising costs of healthcare, and build a cushion into your plan for potential health issues in your later years.1
You also want to take into account the rate of return you earn on your retirement investments. According to the article, a new study shows that the “…combination of expected low returns combined with longer lifespans can dramatically increase the rate of savings required for a secure retirement, especially if you get a late start.”1
Given all of these variables, it is hard to pinpoint what the exact percentage of your salary should be. Therefore, rather than following a general rule of thumb like fifteen percent, experts recommend using a retirement calculator like the T. Rowe Price retirement income calculator. This tool uses what’s called the Monte Carlo simulation. It can estimate your chances of achieving a secure retirement based on your current rate of savings. You can also plug in different rates to see how this would affect your finances. While using this tool doesn’t guarantee you’ll be able to retire comfortably by saving at a given rate, it’s certainly more accurate than guessing or estimating.1
If you’re retirement plan is falling short, and you’re unable to boost your savings enough to get to where you need to be, there are a couple of other options. You may consider working longer, downsizing and/or relocating, or accessing your home equity through a reverse mortgage. Many seniors are turning to a Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, to help them through their retirement years.
If you’d like to learn more about reverse mortgages or want to find out if you’re eligible, please use our Reverse Mortgage Calculator or call us at 800-218-1415.
1 Is a 15% savings rate enough for a secure retirement – money.cnn.com, by Walter Updegrave, 2/15/17, http://money.cnn.com/2017/02/15/retirement/retirement-savings-rate/.
2 Center for Retirement Research at Boston College – How Much Should People Save?, by Alicia H. Munnell, Anthony Webb, and Wenliang Hou, July 2014, Number 14-11, http://crr.bc.edu/wp-content/uploads/2014/07/IB_14-111.pdf.