Net Gains: How Much Should I be Saving?

Want a quick-and-dirty answer to the most fundamental question in personal finance?

There is none. There is no easy answer to the question "How much should I save for retirement?"

But new guidelines on this issue could prove quite helpful as the nation continues its shift away from traditional pension plans and toward 401(k)-style retirement plans.

In April, the Journal of Financial Planning published the guidelines that detail how much money Americans need to accumulate for retirement and how much they should set aside to reach those amounts.

These guidelines cannot account for every possible situation, but they offer good starting points for those wondering where to begin. My guess is they will become the new standards used by financial planners and others. They will replace old rules of thumb like one that says 10 percent of income should be set aside from every paycheck.

The guidelines result from a study by four authors, including Roger Ibbotson, professor at Yale School of Management and founder of Ibbotson Associates, a leading investment research and consulting firm. The others are Ibbotson Associates research consultant James Xiong and financial advisors Robert B. Kreitler and Charles F. Kreitler of New Haven, Conn.

The study challenges old assumptions about how much income is needed in retirement and reinforces the importance of starting to save early in life.

"Those who do save early can save without a significant drop in lifestyle," the authors wrote. "A critical inflection point occurs at age 35 to 40."

Those who delay savings beyond that range, they wrote, face the challenge of having to save significant portions of their income.

The suggested target savings rates range from a low of 5.8 percent of income for a 25 year old earning $20,000 and ready to begin saving to a high of 55.4 percent for a 60 year old earning $120,000 a year with nothing set aside for retirement.

For that 25 year old, that 5.8 percent target amounts to just $22 a week. That 60 year old, however, is looking at the need to save nearly $1,300 a week.

The benchmarks are based on a number of assumptions, including retirement at age 65, continuation of the current Social Security program, 2.5 percent annual inflation and investment portfolios modeled on target-date mutual funds prevalent in many retirement savings plans. They are broken down by age and income.

A key assumption concerns how much income an individual needs to have to maintain his or her current lifestyle. The traditional guideline has been 80 percent of preretirement income.

But Ibbotson and his associates offer a lower figure that reduces what must be saved during working years. Their retirement income figure is 80 percent of net preretirement income. That is gross income minus what an individual had been saving prior to retirement.

For instance, an individual earning $60,000 and contributing $6,000 to savings -- or 10 percent of income -- to retirement savings could expect to live off $43,200 (80 percent of $54,000).

The thinking behind the lower income figure is that somebody who has spent years setting aside money for retirement adjusted his or her lifestyle accordingly and can live on less than previously thought.

Based on that retirement income goal, here are some examples of suggested savings rates developed by Ibbotson, Xiong and the Kreitlers.

For a 35 year old earning $40,000 a year, the guidelines recommend a target savings rate of 12.2 percent, assuming no accumulated savings. But for each $10,000 already saved, the target rate can be lowered by .86 percent. So $20,000 already saved for retirement would yield a target rate of 10.48 percent.

A 45 year old earning $80,000 a year and no accumulated savings would need to set aside 24 percent of income for retirement, the guidelines suggest. For each $10,000 already saved, a reduction of .45 percent could be taken. Thus, a $100,000 retirement portfolio under this scenario would result in a target rate of 19.5 percent and a $200,000 portfolio a 15-percent target. The accompanying table shows how savings rates differ with age and income.

Click Here to See How Much You Should Be Saving

In all cases, an individual's target rate can be lowered by an employer's contribution rate to a retirement savings plan. For example, a 3-percent company contribution to a 401(k) plan would lower the employee's target savings rate by that amount.

In addition to setting target savings rates, the guidelines set benchmarks for how much should be saved by certain ages -- again varying by income -- and how much should be accumulated in total by retirement.

In this column, it is impossible to provide every detail of the guidelines, but the original study can be found at Journal of Financial Planning Web site.

Also, Morningstar – which owns Ibbotson Associates -- has developed an online calculator based on these guidelines.

Check them out, and you'll see the importance of saving early and often.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning ( in Falmouth, Mass. Before establishing the firm, he worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, which is dedicated to providing financial planning and advice to clients on an hourly, as-needed basis. Contact David at