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Executive Summary

National Savings Rate Guidelines Study
By Roger Ibbotson, PhD; James Xiong, Ph.D., CFA; Robert P. Kreitler, CFP; Charles F. Kreitler, and Peng Chen, Ph.D., CFA


Executive Summary

Purpose
The amount you save and when you start is just as important as your asset allocation. But this fact is not widely recognized. Our goal is to shed light on the importance of saving and to provide a rough guideline of how much investors need to save to reach their retirement goals. This paper does not replace the value of professional advice, it is meant as a starting point for investors and advisors to create a personalized plan. This study provides savings guidelines for typical investors with different ages, income levels, and initial accumulated wealth.

Past Savings Studies
The study differs from previous savings studies in several important ways.

• We calculate the savings guidelines and capital needs as a percent of net pre-retirement income-pre-retirement income minus annual retirement savings. (Because investors' annual savings are not used to cover living expenses, we reduce the pre-retirement income level.)
• The study also uses Monte Carlo simulations and Ibbotson Associates' to project pre-retirement portfolio returns.

Assumptions
To create this guideline we had to make certain assumptions, which is why it is a rough guide rather than an exact roadmap. We tried to make reasonable and conservative assumptions:

• People invest their savings to match the asset allocation of a typical age-appropriate target maturity fund.
• Investment fees are not taken into account when calculating performance.
• Ending wealth value needed for retirement is the monetary sum it would take to buy an inflation-indexed lifetime fixed-payout annuity that would cover the difference between Social Security payments and 80% of net pre-retirement income. We are not suggesting that all investors should put all of their money in annuities, but we use the annuity formula as a reasonable and conservative way to estimate how much income the savings can sustain on an inflation-adjusted basis through retirement.
• Social Security benefits are based, with some simplifications, on calculations that the Social Security Administration posts on its Web site. One of the simplifications is to assume full Social Security benefits are available at age 65 instead of age 67 to match the commonly accepted retirement age. (Current law is phasing the age when you receive retirement benefits to age 67)
• The savings rate guideline is for an individual. While a couple would have a longer joint life expectancy and therefore require more wealth, we suspect that spousal Social Security benefits more than offset the additional cost-but this will require additional research to verify.
• Investors' income is assumed to increase with inflation. If a person's earnings increase faster than inflation and their expectations of retirement income also increase, they may need to increase their savings rate. Investors should reevaluate their progress and adjust their savings over time.

Caveats
This savings guideline will be more accurate for younger investors, because they tend to have less wealth and simpler financial situations. Older investors, in particular the ones with more complex financial picture, should consult with a financial advisor to determine an exact savings rate.

Interesting Findings
In addition to the guidelines listed in Table 2 of the paper, some other interesting findings emerged.

• The study shows the importance of starting to save no later than age 35. Those who do save early can save without a significant drop in lifestyle. A critical inflection point occurs between ages 35 and 40. Individuals who start saving for retirement after age 35 face the challenge of an increasingly higher savings rate needed to accumulate sufficient capital. For example, the recommended savings rate for a person starting to save at age 25 typically more than doubles if he or she waits until age 45 to start saving, and triples at age 55.
• Social Security benefits have a greater impact on low- and moderate-income individuals than they do on high-income individuals because benefits are capped at certain income levels. Higher-income people will therefore have to save more to offset the lower proportional benefits.
• Workers whose income increases faster than inflation will have to save an increasing amount to "catch up" so as to be able to provide for the higher assumed standard of living in retirement.

Conclusion

• Though this is a rough guide, the savings rate table can be adjusted to take into account some individual circumstances such as employer-defined contribution matching programs, pension benefits, accumulated wealth, ages not listed on the chart, and different percentages of replacement income.
• The world and individuals' personal circumstances are ever changing. The savings guidelines should be considered as a guide only; individuals should monitor their progress and adjust their savings over time to ensure they reach their goals.
• We developed these savings guidelines with the hope that once people are aware of how much they should save, they will better prepare for retirement. Our intention is to make this data available for all to use.

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