Best New Ideas in Retirement

Aug. 17, 2019, 10:37 a.m. EDT

The new math of saving for retirement may boil down to this one, absurdly simple rule

Why you should be saving at least 10% of your salary

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By Joshua Gotbaum


Illustration/Sam Island

“Eventually, I’ll stop working.” Most of us think that and know it will happen, but millions of us worry whether we’re saving enough to live on once we do. We want to know: How much of my earnings should I set aside? What’s the magic number? 3%? 5%? 10%? More?

What your financial adviser won’t tell you:

Unfortunately, the retirement industry has spent decades largely avoiding the magic-number question. “There’s no magic number for everyone,” some say. “It’s complicated,” say others. And then they offer, sometimes for a fee and sometimes for “free,” to take our money and invest it for us — often without telling us whether it’ll be enough when the time comes.

Why will no one give us a magic number? They don’t want to be legally responsible when the number turns out to be too low, which, for some of us — especially those whose pay is low or whose investments are poor or who live long and need a nursing home for years — it will. The legal jitters are understandable, but they leave us in the dark about how much to save.

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The new math of retirement: Save 10%

For years, the retirement industry has failed to say exactly how much money people need to save for retirement. There's now an answer: 10% of your income.

Don’t give up hope. There’s research that can help — from institutions that don’t have a conflict of interest because they don’t invest or give advice. My favorite is the Employee Benefits Research Institute in Washington, D.C. EBRI, as it’s called, gathered anonymous information on tens of millions of people and how they actually save. It won’t tell people what to do, but from its research there’s a pretty useful rule of thumb for young people: Count on your fingers and …

Save 10% — now

Between you and your employer, set aside at least 10% of your paycheck. If your employer contributes 3%, then your share is at least 7%. If the company kicks in 5%, then you save at least 5%. If your employer does nothing, set aside at least 10% of each paycheck on your own.

Of course, there will be times when you’re between jobs or you need your money for a pre-retirement-age emergency. In those cases, you can put your money in a Roth individual retirement account (IRA) account. That way, you can take your contributions out without penalty. (There are also Roth 401(k) accounts, though they have more complicated withdrawal rules.) Don’t let the fact that you might need money someday keep you from saving for retirement now.

It’s perfectly OK to consult a financial adviser and get more personalized recommendations, but if you can’t or don’t want to — or while you’re waiting to “get around to it” — set aside enough so that, together with your employer match, you’re putting aside at least 10%.

Read: Where’s the best place for me to retire?

America’s No. 1 fear: golden years minus the gold

People are living longer. That’s both good news and bad: We hear about baby boomers moving into posh “active adult” communities, but we also hear about disabled and bedridden elderly requiring years’ worth of health aides and the constant help of their children. Either way, longer lives seem expensive.

And our capacity to lay the groundwork for retirement can feel pinched from all directions. Life can be expensive even in our earning years, with college tuition, housing and medical costs in the stratosphere. Student loans and credit-card debt intrude. Social Security, we’re told, is at risk. Lifetime pensions are, for most, a thing of the mythical past. All that most of us feel we can count on is a retirement account that’s at the mercy of the markets and, we suspect, doesn’t have enough in it. Many, of course, don’t even have that.

A contribution rate of 10% starting in your mid-20s cuts the risk of running out of money in retirement to about 30%

Experts often tell us how complicated this is to figure out — and why we should hire them to do it for us. And it is easy to make it complicated: We can try to decide — now, decades before we’re ready to even think about retiring — what our future earnings will be and how long we’ll work, what lifestyle we’d prefer in retirement, how much health care will cost decades down the road, how long we’ll live after retirement (with a margin for error, of course), how our money should be invested and what our investment returns will be (with, again, a margin for error). Not complicated enough? Add whether or not we’ll need funds at hand to support children or parents or other family members.

The result is confusion. Some people get financial advice. Others turn to online retirement calculators. Many, sadly, do nothing at all, falling back on a vow of resignation: “I’ll just keep working.” (Spoiler: Almost no one who says they’ll work until they die ends up doing so.) For still others, it means saving too little.

Modeling for millennials

How can EBRI’s model help? It estimates the risk of running out of money after retirement by taking into account many more factors than the usual online calculator: contributions, market changes, Social Security benefits and salary growth, as well as a range of health outcomes and longevity prospects. It can then estimate the risk that — for particular savings rates and income levels — a person’s expenses in retirement will overwhelm their savings plus Social Security benefits.

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