cropped-pension-parameters-logo4.jpgSaving for retirement is something virtually everyone agrees with. But exactly how much, well, that’s another question. And it’s one that’s addressed comprehensively by the always informative Steve Vernon in a superb MoneyWatch piece headlined Solving a retirement saving puzzle. “Everyone knows how important it is to put money away for retirement,” he writes. “But if you save too little, you’ll be poor later on. If you save too much, you may be denying yourself the good life today. So, how do you decide how much you should contribute to your 401(k) or IRA?” Other major excerpts from his article:

“You could rely on guidelines published by such knowledgeable institutions as Fidelity Investments or the Boston College Center for Retirement Research (CRR). Both organizations suggest a contribution that’s equal to 15 percent of your pay. This amount includes any employer contributions, so if your employer adds or matches 5 percent of your pay, you would only need to put away only 10 percent of your pay.

“Both Fidelity and CRR base these suggestions on four important assumptions:

  • You want the same standard of living in retirement as in your working years.
  • You start contributing in your 20s or mid-30s and save continuously until age 65 (CRR’s analyses) or 67 (Fidelity’s analyses).
  • You retire full time.
  • You earn rates of return on your savings that are representative of historical levels.

“Some analysts have criticized 15 percent of pay as being too high, reasoning that retirees’ living expenses drop significantly as children move out of the house and they pay off their mortgage. True, but other life events can happen to counteract these savings, which could support an argument for higher contributions. For example:

  • You may lose your job or become disabled before age 65 and need to retire early.
  • You might experience interruptions in your savings for various reasons including job loss, child rearing and college education for your children.
  • You could get divorced and have to divide your retirement savings.
  • The stock market might crash just before your retirement.

“Another consideration is the freedom you can experience if you accumulate sufficient amounts to retire.

“Finally, the 15 percent suggestion assumes you efficiently deploy your savings when you retire and don’t use high-price investments or insurance, or make other investing mistakes. Contributing smaller amounts may leave you with little margin for error.

“Fifteen percent should really be just a starting point for your planning. Ideally, you’d take into account your own circumstances and goals, including:

  • The age at which you wish to retire
  • The amount of retirement income you really need
  • The amount of savings you’ve already accumulated
  • The rate of return you expect on invested savings

“If you’re the type of person who likes to juggle numbers, you can use one of the many online retirement calculators to help you determine the right amount to save. To personalize the calculation, these tools will ask you questions about the above topics and more. The more questions you’re asked, the more “precise” the estimate will be (although it’ll take longer to navigate the calculator).”