How much are you saving for retirement? Experts recommend
socking away at least 10% of your salary, but a recent report from the Plan
Sponsor Council of America (PSCA) suggests many Americans are short of that
The PSCA, which helps employers manage their retirement
plans, concludes that the average American worker contributes just 7.6% of
income to a workplace retirement plan. And you have to wonder: Is that enough
to secure a comfortable retirement?
As you'll see below, a deeper dive into the numbers suggests
it is possible to fund a decent retirement by contributing less than 10% of
your salary, though there are some major caveats. For one, you need to start
saving in your 20s. You also need to be earning more than 5% in employer
And even then, you won't have any financial leeway to handle
unexpected circumstances. That's a tough one, because there are many factors
that could derail your savings efforts and your financial security, like health
issues, financial-market and economic cycles, and unexpected changes in your
Saving at a higher contribution rate adds flexibility to
help you deal with those uncertainties. But if times are tight and you can only
afford a contribution of around 8%, here's a peek at what your retirement might
Projected income from retirement savings
Let's say you make $54,236 a year, which is the mediansalary
for a worker age 25 to 54. The PSCA report pegs the average employer matching
contribution at 5.3%. That, combined with your 7.6% contribution, puts nearly
$7,000 annually into your 401(k). Invest those contributions mostly in stocks
to earn an average of 7% annually, and your retirement account balance should
grow to about $665,000 over 30 years.
That $665,000 in retirement savings should provide income of
$23,000 to $27,000 a year. That's based on the idea that it's safe to pull out
3.5% to 4% of your savings balance each year in retirement. At that
distribution rate, your money should last as long as you do -- even through
bear markets and rough economic cycles.
Social Security income
You should also have Social Security benefits coming your
way to supplement your income from savings. In its current form, the program
replaces about 40% of income for the average worker. This guideline holds only
if you wait until you reach full retirement age (FRA) to claim your benefits.
Claim earlier than that and your benefits will be lower. Assuming you were born
after 1959, your FRA is 67.
On an annual salary of $54,236, 40% equates to about
Total projected income in retirement
Assuming you pull $25,000 annually from your savings and you
receive $21,700 from Social Security, that adds up to total retirement income
of $46,700. It may not sound like a lot, but it is 86% of the working salary we
started with. If your living expenses go down slightly in retirement because
you've paid off a mortgage or you're no longer making retirement contributions,
you could possibly squeak by on 86% of your working income. But it's a tight
fit: So tight that this plan doesn't allow for some fairly common scenarios.
Things that can go wrong
Here are five of those common scenarios, any one of which
could break your retirement plan.
- You have less than 30 years to save. If
your timeline is shorter than 30 years and you haven't already been saving,
you'd have to contribute far more than 7.6% of your income to amass enough
savings to supplement Social Security sufficiently to cover your living
- Your employer match is lower than 5.3%. A
lower employer match would require a higher contribution from you to reach the
target savings balance.
- You have to retire early because of work or
health issues. If you retire early for any reason, your Social Security
benefits will be lower. That reduction can be as high as 30%. The earlier you
claim, the bigger the reduction.
- You have an emergency and have to take funds
from your retirement account. If you borrow or withdraw any of your
retirement plan funds, you'd have to increase your contribution rate
substantially to get back on track with your plan.
- Medical expenses in retirement raise your
cost of living. You might find that the 86% income replacement isn't
enough. There can be various reasons, but high medical expenses are a common
culprit. You can hedge against this by contributing additional amounts to a
health savings account.
Save more than you think you need
For most savers, the average 401(k) savings rate of 7.6%
isn't going to be enough. The numbers might barely work on paper, and only for
younger workers. But the margin of error is too slim to provide any peace of
If you can, target a savings rate of 10% to 15%, not
including your employer match. If that's not doable, plan to increase your
contribution rate annually or whenever you get a raise. The sooner you start
that habit, the easier it will be to secure that comfortable retirement you
Click here for the