The amount of money that needs to be saved to ensure a comfortable and financially secure retirement can differ from person to person based on a handful of variables, e.g. desired old-age lifestyle, planned retirement age, etc. However, one thing that does hold true for all retirement savers is that the sooner they can start tucking money away the better. For example, a study from Boston College’s Center for Retirement Research (CRR) estimated that a medium earner in America who did not start saving until the age of 45 would have to set aside 27 percent of his or her annual salary in order to retire at 65 and still attain a 70 percent income replacement ratio. The required savings rate was just 10 percent for middle income workers who began saving at age 25.
Similarly, a Financial Engines study calculated that a hypothetical 40-year-old would have to save more than 16 percent of his or her salary each year in order to have close to $500,000 by age 65, while individuals who started at age 25 would only have to set aside 6 percent of their income annually. If people do start saving for retirement early on in their working career, then a recent report from the Plan Sponsor Council of America (PSCA) suggests that many Americans are well on their way to achieving that $500,000 nest egg and perhaps even surpassing it. Indeed, the average contribution rate for employees participating in 401(k) plans in 2015 (most current data available) was 6.8 percent of gross annual pay, up from 6.5 percent in 2014.
Employers are doing more to help workers achieve their retirement goals as well because the average company contribution to 401(k) plans was 3.8 percent in 2015, an increase from 3.2 percent in 2014 and likely a response to a tightening labor market. It is also encouraging to see that 81.9 percent of 401(k)-eligible employees made contributions to their plan in 2015, a five percentage point rebound from 2010. Greater adoption of automatic enrollment has likely contributed to these positive trends, along with the large gains in the number of sponsors setting their default deferral rate above 3 percent and incorporating automatic escalation. Hattie Greenan, PSCA director of research and communication, added that “by designing plans that include features such as automatic enrollment and options such as target date funds and Roth 401(k), plan sponsors are helping to advance the interests of all participants and grow America's retirement savings.”
Sources: Boston College (CRR), Financial Engines, PSCA, Pension & InvestmentsPost author: Charles Couch