Net Gains: How Much Should I be Saving?

Oct. 17, 2007 — -- 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.