There’s a lot of debate about “the magic number” – the term used to describe how much money you need to save to live a financially comfortable retirement. A quick search reveals wildly different ideas about what your retirement savings should look like when you finally stop working. Additionally, you can find free online calculators – most showing little agreement with each other.

Why so much disagreement? Because making plans for the future depends on a lot of unknown variables. You don’t know how long you’ll be able to work, how well the world’s investment markets will perform, which life events might happen to you or how long you will live. Any calculation is an educated guess at best.

What is possible, however, is to operate under some rules that make assumptions. For instance, you could assume that you’ll have a steady income until age 65.

That’s exactly what drives many of the leading theories.

Understanding Replacement Rate

Academic studies of retirement saving often throw around the term replacement rate. Simply, it’s the percentage of your salary that you’ll receive in retirement benefits after you stop working. If you made $100,000 a year when you were employed and receive $38,000 a year in retirement payments, your replacement rate is 38%. (Needless to say, this figure is much too low for most people.)

How Much Do You Need to Save?

Now that you understand replacement rate, let’s look at some new research. The Center for Retirement Research at Boston College looked at what various types of people have to save to achieve a replacement rate of around 70%. That's the overall amount people need to retire at comfortable level, according to the study's authors, Alicia H. Munnell (the center's director) and her associates Anthony Webb and Wenliang Hou. The figures varied depending on whether the person was replacing an income that was low (80% replacement rate needed), middle (71%) or high (67%).

They found that individuals earning the average wage would have to save 15% of their earnings every year to meet a 70% replacement rate at age 65. The biggest factor in the calculations was age – when you started saving and when you ended. Start saving at 25 and you only need to earmark 10% of your annual salary to retire at 65; if you wait until 70, you'd have to save only 4% annually.

The numbers are much worse for those who start late. If you waited until age 45 to start saving, you would need to put aside an unrealistic 27% of your salary for retirement. This would pretty much force you to work until age 70 so you could save a more realistic 10% annually.

In another study, Wade D. Pfau, CFA, professor of retirement income at The American College, found that historical data over nearly the past century indicate that a person would have to save 16.62% of salary to retire 30 years after beginning the savings plan with enough money to fund a replacement rate of 50% from his or her "accumulated wealth." (Unlike the Boston College researchers, Pfau didn’t include Social Security income or "any other income sources" in his 50% calculation. Adding in Social Security and, say, pension income would move the replacement rate significantly higher.)

If all of these facts and figures seem a little confusing, simply remember this: Start saving for retirement as early as possible.

What to Invest In and When to Withdraw It

Pfau's research highlights two other important variables. First, he notes that over time the safe withdrawal rate – the amount you can withdraw after retirement to sustain the fund for 30 years – was as low as 4.1% in some years to as high as 10% in others. He believes that "we should shift the focus away from the safe withdrawal rate, and instead toward the savings rate that will safely provide for the desired retirement expenditures."

Second, he assumes an investment allocation of 60% large-cap stocks and 40% short-term fixed-income investments. Unlike some studies, this allocation doesn’t change throughout the 60-year cycle of the retirement fund (30 years of saving and 30 years of withdrawals). Changes in the person’s portfolio allocation could have a significant impact on these numbers, as can fees for managing that portfolio. He notes that "simply introducing a fee of 1% of assets deducted at the end of each year would increase the baseline scenario’s safe savings rate rather dramatically from 16.62 % to 22.15%."

This study not only highlights the pre-retirement savings needed but emphasizes that retirees have to continue managing their money to prevent spending too much too early in retirement.

The Family Factor

These studies calculate savings for individuals but what about families? Parents with young children have to save for their college – ideally at least $2,500 per year, per child, from birth – to cover cost of a public university. Click here for savings calculators that will let you figure costs more precisely based on your income and education goals. Costs associated with children make saving for retirement even more daunting. See Don't Forget The Kids: Save For Their Education And Retirement.

But there’s good news: Retirement savings for a husband and wife don’t compute to twice the cost of what an individual needs. Married couples share many significant expenses – a home, for example.

The Matching Fund Bonus

For people who start saving early and take advantage of employer-sponsored plans such as 401(k)s, meeting saving goals isn’t as daunting as it may sound. Employer matching contributions could significantly reduce what you need to save per month.

The Bottom Line

There’s no way to accurately forecast your retirement needs since nobody knows what their future holds. However, educated assumptions based on historical data yield fairly clear benchmarks. Aim to save 16% of your annual salary if you’re early in your career. If you make $50,000 per year, save $8,000 per year or about $666 per month. A tough task? Maybe. But if your employer is matching your savings, that $666 could be $333 if the company matches your contributions dollar for dollar.

It will take discipline, but it’s better to sacrifice while you’re able to work instead of reaching retirement with too little money and too few options. See How To Start Saving For Retirement and Which Retirement Plan Is Best?

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