A new study from the Center for Retirement Research at Boston College concludes that retirement security depends more on the things we can control than on the things we can’t control, like investment returns. The most important things we can control are when we start saving, how much we save and when we retire. The full report “Plan for a secure retirement” by Alicia H. Munnell, Francesca Golub-Sass and Anthony Webb is at: http://crr.bc.edu/images/stories/Briefs/IB_11-13.pdf
The report looks at the earnings levels for three groups of individuals: low wage earners, moderate wage earners and high wage earners. Then for each group, it determines the savings rate needed to replace a reasonable percentage of earnings immediately preceding retirement. The requited savings rate depends on when you start saving and when you want to retire.
For example, let’s assume that you are a moderate wage earner and start saving at age 35. Here is the required savings rate to replace 80% of your earnings immediately preceding retirement:
• Save 35% of wages every year, if you want to retire at age 62.
• Save 24% of wages every year, if you want to retire at age 65.
• Save 18% of wages every year, if you want to retire at age 67.
• Save 11% of wages every year, if you want to retire at age 70.
These estimates assume that your real rate of investment income is 4% every year. Lower investment returns will require more savings and higher investment returns will require fewer savings. We can control when we start saving, how much we save and when we retire. But we can’t control our investment returns. Investment performance is a real wild card in today’s environment.
The authors conclude that “Starting early and working longer are far more effective levers for gaining a secure retirement than earning a higher return.”