You Haven’t Seen This Inside Scoop On Your Retirement Savings
The best place to start this discussion so that everyone is on the same page here is with a good working definition of Required Retirement Savings Rate. In short, Required Retirement Savings Rate is the savings rate you “should be” setting aside for your future retirement in the years ahead.
Rule of Thumb
It used to be that a common percentage was thrown about to answer the question of how much should you be setting aside for your retirement. Oftentimes, this number turned out to be 15%. For the record, 15% is not a bad way to start. Yet at the same time, as you probably already suspect rules of thumbs are only ever a starting point. In other words, if you didn’t want to bother to take the time to figure out a realistic rate of retirement savings, at least going with a rule of thumb like the above would put you in the right ball park.
Where Do These Numbers Come From?
Actually, the traditional resource for the Required Retirement Savings Rate turns out to be our very own Federal Reserve Board. As you already know, the Federal Reserve System was put into place years ago to provide the nation with a safe and stable monetary and financial system. Part of the way that the Federal Reserve fulfills its mission is to conduct studies and research on personal financial issues such as retirement savings. Bottom line: the granddaddy of recommended retirement savings rate is the Fed.
What Does The Fed Say?
The Federal Reserve set up a way to assess retirement risk for the nation as a whole. This shows up in what the Fed calls its National Retirement Risk Index (NRRI). According to the parameters of the NRRI, the FED bases its model on an average 73% replacement index. In other words, when a worker retires, for the nation as a whole, a fairly substantial 73% of that worker’s income needs to be replaced during retirement years.
Now understand that this number is in fact an average. It turns out that this average can be broken down even further. For example, a relatively low income worker would need to replace all the way up to 80% of their employment income. On the other hand, a higher income individual would need only replace a mere 67% of employment income. As you might well expect, the middle income worker falls right there in the middle at 71%.
Now that you understand what Required Retirement Savings Rate is all about, the next question is what to do with this information? Can all of the above percentages be used to optimize your own retirement plan? Thankfully, the answer is a resounding Yes.
Where You Start Matters
Certainly you will not be surprised to learn that when you start setting aside money for your retirement makes a big difference in how much you need to set aside. For example, should you be or have been savvy enough to start setting money aside in your mid-30s, you could most likely get away with setting aside a mere 65 of your income—assuming you will work to at least age 70.
On the other hand, if for whatever reason you didn’t set the money aside or even if you did set the money aside and had to pull it out for some emergency, you will have to put in substantially more. Suppose for example you suddenly find yourself at age 62 with no retirement savings to speak of. To get yourself back on track you will need to set aside a relatively high 24% of your income. Naturally, the 45 year old worker in the same position could get away with a bit less; in this case about 10% set aside until retirement at age 70 would do the trick.
Did you see a pattern in the above? It’s not a trick question at all. In fact, it is nothing more than the new retirement math. Here it is: all of the above percentages and strategies assume you will be working up until age 70. Were you planning on working that long?
The Bottom Line
If in fact you want to retire at least reasonably comfortably, you must take charge of your personal finances and start setting money aside right now. As demonstrated above, both when and where you start makes a big difference.
What About You?
So what about you? Where are you with your retirement savings?