How much to save for retirement? This question is one that has been asked of financial planners since time immemorial, and the answer is not so easy to calculate. The standard answer to this question has typically been that an individual should save 10 percent of income, but that amount may be too high or too low, according to a study that was completed recently by Massi DeSantis and Marlena Lee, both of Dimensional Fund Advisors, a mutual fund firm in Austin, Texas. Based on your pre-tax household income, here is a general guideline that Lee and DeSantis came up with to determine how much of your retirement income should be made up of your own savings: • If your income is less than $25,870, you should aim to retire on 82 percent of that amount, and 59 percent will come from Social Security and 23 percent from your savings; • If your income is greater than $25,870, but less than $49,940, your total retirement income goal should be 72 percent of your income: 38 percent from Social Security and 34 percent from savings; • For incomes between $49,941 and $86,881, 62 percent of that amount should be your goal and 31 percent would come from Social Security and 31 percent from savings. • Finally, if your household income is greater than $86,882, your replacement rate should be 62 percent: 21 percent from Social Security and 37 percent from your savings. Here is a good test from Lee and DeSantis to determine if you are on track or not. Simply divide your accumulated retirement savings assets by your current income. That calculation will provide you with an asset-income multiple. If you want a 30 percent income replacement with a 90 percent probability of success, your multiple at age 45 should be 3.125, at 55, it should total 6, and at 65 the multiple should be at least 6.75. For a 60 percent replacement rate, your number at 65 should be 13.5.
Posted on: Sun, 26 Oct 2014 15:59:51 +0000
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