Comfortable Retirement = Saving 11 Times Working Income?

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Via the NY Times, benefits consultant Aon Hewitt released their 2012 Real Deal study about workers at large companies and their readiness for retirement. The study assumes that an employee will work at least 30 years with some large company, not necessarily the same one, and then retire around age 65 with Social Security kicking in. It does not reflect savings or other retirement assets outside of the employer-sponsored plans (IRAs, taxable brokerage accounts, etc). The key findings of the study are summarized below:

85% replacement ratio. Using various assumptions, they find that the average worker will need about 85% of their pre-retirement income to maintain their standard of living. I suspect that most of this number comes from the finding that you need to save about 15% of your income for retirement, and it assumes you spend everything else. Thus, after retirement you have the remaining 85% to cover.

Average employee needs to save 11 times pay. The amount needed at “retirement age” (~65) to cover retirement expenses through an average life expectancy (age 87 for males, age 88 for females) is 15.9 times pay. Social Security is estimated to cover 4.9 times pay. Therefore, the employer needs to save 11 times pay.

Average employee is expected to have 8.8 times pay. This is the sum of pension benefits, employer contributions to 401k/403b-type plans, and employee contributions to those plans. This leaves an average shortfall of about 2.2 times pay. 30% of people are on track or better, 20% are very far behind, and the rest are somewhere in in the middle.

I’m hoping that this study will have nothing to do with me as the idea of working full-time in a large corporation until 65 sounds quite horrendous. 🙂 The overall takeaway is that retirement will still happen for most people as long as they work until Social Security, even if it might not be as nice as they’d like it to be. 11 times final income seems a reasonable rule-of-thumb for this traditional definition of retirement, but using income as a multiplier is annoying to me because it locks you into the assumption of a 15% savings rate.

In terms of non-traditional early retirement, I still prefer the rough rule of saving about 30 times our annual spending for early retirement. Your savings rate will have to be much higher than 15%. If you spend $50k a year, you’d need to save $1.5 million. If you own your house and otherwise spend $2,000 a month, then you’d need to save about $720,000. Using this metric, lots of people could retire on less than a million dollars even today.

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  1. kids? that messes things up

    • Bluffguy says

      Re Kids…..If you bring them up right and they are successful they will take care of you in retirement. My kids have already offered to do just that ! I am very lucky ! It was the deal we made when we helped them through college and now they are cheerfully stepping up to it !

  2. Jenna, Adaptu Community Manager says

    I love that owning your own home drops the amount you need to have saved for retirement.

  3. What happens if real estate taxes go up? Like they normally do now…
    Does it mean that you are bound to your home and cannot travel.
    If you travel only 2 weeks a year while working maybe you want to travel slightly more if you are not working full time.

  4. You suggest saving 30 times current annual spending – should that include mortgage payments and 529 contributions as well?

    As per mint, my top spending categories (excluding taxes) are housing and kids. They account for ~50% of my monthly ‘spending’. I won’t be (hopefully) spending any money on these 2 categories in retirement.

    Now, what are the major cost categories during retirement?

  5. @Eugene – I’m not sure I follow. RE taxes may go up over time, but so do most other expenses. If you don’t want to be bound to your home, you can always sell and move. It’s just that buying and selling residential homes repeatedly has high transaction costs.

    @whytax – It’s whatever you expect to spend in “retirement”, not current annual spending.

  6. Man I hope I don’t have to have 11 times my salary before I can retire.

  7. No one is “average” — IMO, these metrics are somewhere between useless and a disservice to those who blindly apply them to their unique situation.

  8. The problem with this is that they assume people spend their entire salary. A more accurate formula is to multiply your expenses by the number or years you expect to live. Throw on a little extra for emergencies.

  9. I am not sure if I would need 11 times my salary, and I am not sure if I could save 11 times my salary. Currently, I am paying for my kid’s UC tuitions; it was kind of “promised” to be graduated in four years, but these days because of the budget cut, fewer classes are offered resulting in that kids would be graduated in five or six years–that is, I have to pay five to six years’ tuitions for the four-year degree.

    I wonder whether I would need 11 times my salary for retirement; for I have no mortgage payment until I change my mind and buy a third house. I think, during my retirement, I have to pay car and house insurance and real estate tax on the two houses. At that time, I don’t expect to pay much income tax.

    Then, what would be other additional spendings that require more of my savings/income supplement? Oh, yes, travel costs and medical expenses.

  10. Where does health insurance fit into this scenario? Lots of people feel obligated to work until they are old enough for Medicare because of the need for health insurance. A major medical emergency could otherwise easily wipe out a lifetime’s savings.

  11. This article points out my pet peeve. The amount you need to save for retirement is determined by your post retirement *expenses* not your pre-retirement *income*. They are not the same thing! This study assumes (as many do) that you will need 85% of your pre-retirement *income* in your post retirement years. So they are basically assuming that one is spending 100% of their income before retirement. This is not necessarily true. Many people at this stage are spending little and saving lots. Consider two couples age 60, each making $100,000. Couple A drives used cars, home is paid off, kids done with college, expenses $40,000 per year. Couple B has $60K worth of cars in the garage, a boat, a cottage on the lake, a big mortgage. Expenses= $100,000. According to this study’s assumptions, each of these couples would need 1.1 million (11 times pay) to retire at age 65. Couple A would have very low requirement for savings compared to couple B.

    “Retirement Calculators” that make this assumption are worthless. The only way to calculate ‘how much you need to retire” is to start by estimating what your expenses will be after retirement.

    • bluffguy says

      Maybe Couple B is not in such a hurry to retire, seems like they are already living the good life !

  12. From what I read elsewhere, and what I’ve been using as a guideline, is that you should have 3 to 4 times your pay saved for retirement by the time you’re 45, then 6 to 8 times your pay by the time you’re 55, and have 10 to 12 times your pay saved by the time you’re 65.

  13. Fred Fnord says

    What? Only twenty percent are ‘far behind’?

    54% of retirees, two years ago, said that they had less than $20,000 saved. It’s hard to believe that basically none of these worked for large corporations.

  14. I think the importance of long term care insurance should have been mentioned. So if your health takes a turn for the worst, your assets will be protected. A lot of the top long term care insurers are getting out of the game, meaning not offering new policies (Prudential and Met Life) or drastically increasing prices (Genworth).

  15. The math in these articles is always thought provoking.
    The number is really a moving target. Ten years ago, half my expenses were mortgage, college savings, and nanny. My mortgage cost has dropped by half, college is funded, nanny long gone, but other expenses have taken over.
    I agree that looking as savings as a multiple of current expenses has value, it’s the right metric to use. The closer to retirement, the more clear these numbers will be. We are nearing 14X expenses, and view 25 as the right number. Since we’re planning to ignore social security for purposes of choosing the right time to retire, I guess the 30 you cite is right in line.

  16. I think you have a typo in your “85% replacement” paragraph.

    You said:

    the average worker will need about 15% of their pre-retirement income

    Should that be

    the average worker will need about 85% of their pre-retirement income

  17. Between taxes and inflation, I’m baffled how many people can save for anything.

    I pay 23% of my income before and after my check and this is before I even get to pay the mortgage or buy food. And I am no where near a ‘rich’ person.

    Hopefully, the government will take care of me. :LOL:

  18. “Work at least 30 years …then retire at 65”? What did they do between college and 35? If you shade the results as work “around” 40 years then retire…. you have much more depressing statistics… and this then only is expected to last to 87? Some one is taking a big cut of the workers pie in these numbers.

  19. Stats like these often make me believe so much more in building income streams rather than just “normal” investing. If you could build another income stream it could even bring the multiple down even lower.

  20. @Brandon – Correct!

    @Thad – These days aren’t kids supposed to “find themselves” and live at home until 35? No? 🙂

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  22. Retirement is becoming more of a problem for all Americans. While the economy is not doing well, there are the considerations of underfunded defined pension plans. Bottom line, many will have to take less in the way of what they were promised or take nothing at all. I listed a number of possible solutions including some “not so traditional” methods on my retirement blog. I think it’s time that people start thinking “outside the box” including reverse mortgages and home based business. If you possess specialized knowledge, consulting may be the way to go. You don’t have to make a bunch to make the Golden Years truly “Golden”. What’s the alternative… move in with the kids? Heaven Forbid.

  23. Great post. One quandry for investors is how to allocate the pie after they retire and start the depletion or withdrawl phase. Most of the talk in this context is how to get the highest ” Income” or ” Yield”

    That may have worked when Americans retired at age 65 and lived for 7-10 years with a full pension and social security. But today, a healthy 65 year old couple faces about 45% odds that one of the two will still need to purchase groceries and healthcare 30 years later!

    In this new world, world ” Total Return” is probobly a more critical investment focus than ” Income” or ” Yield”

    More on this topic can be found below:

  24. NuView IRA says

    Interesting post when it comes to your math. The only problem is that it looks like the person spends their entire salary. In addition, your pre-retirement savings should reflect your post retirement expenses. A person that is frugal pre-retirement will require less money to retire on than a person who constantly spends.

  25. I agree with your annoyance. This is my problem with these types of multiplier calculations. I happen to save about 45% of my income and want to know when I can retire. They say 12 times income, but what they really should say is something times expenses. This would allow me to figure out what I truly need to retire early.

    Taking your calculations I figured my expenses ( the actual amount I spend each year) is $45K. Add back the 15% they are basing the multiplier on and I get $52K as the working income. So 12x $52K is $621K at retirement. This is assuming I retire when Social Security is available to supplement. If I want to retire early I would need 15.9 X $52K which is still only $826K. Feeling good now that you helped me figure that out. Thanks.

  26. Early on, say in one’s 30’s, the 80% rule of thumb is as good an estimate as any.
    Once really settled down, mid-40’s or so, spending levels out, the expense of the kids is a known entity, etc. That’s when you can best start to project needed retirement income.
    Take that number, subtract SS, then multiply by 25. Not too much to calculate.

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