The shift from traditional pensions to 401(k) plans hasn’t gone well for most workers. One in two U.S. households are destined for a lifestyle downgrade in retirement, data show, as guaranteed lifetime income from old-style pensions disappears. But new research finds that most families can stay on track to a comfortable retirement by regularly saving 15% of pay over 30 years. Start earlier, and you only need to put away 10%.
The news isn’t all bad if you're starting late. Even folks past age 50 have time to adjust. But clearly those with the shortest windows to retirement have the steepest hill to climb—and probably need to start factoring in a longer working life and more austere retirement lifestyle right away.
The typical middle-income household headed by someone 50-plus, and with a projected retirement shortfall, would need to boost its savings rate by 29 percentage points to retire comfortably at age 65, according to the Center for Retirement Research at Boston College. That would mean saving, say, 39% of every paycheck instead of 10%.
Calling this savings rate “unrealistic,” researchers Alicia H. Munnell, Anthony Webb, and Wenliang Hou conclude in their paper, “A better strategy for these households would be to work longer and cut current and future consumption in order to reduce the required saving rate to a more feasible level.” One thing the paper does not mention is that one in 10 U.S. workers is limited or unable to work due to poor health—and those past age 65 are three times more likely to have this issue, according to the National Health Interview Survey.
On a cheerier note, younger middle-income workers currently on track to fall short of retirement income still have time to realize their dreams by boosting savings just 7 to 13 percentage points (the younger you are, the lower the savings rate needed), research shows. The impact of starting early and letting your savings compound over more years cannot be overstated.
The typical wage earner planning to retire at age 65 in 2040 would need to build a nest egg of $538,000, the paper states. By purchasing an immediate annuity, you would replace 34% of pre-retirement income. Social Security would replace 36% of pre-retirement income—in all giving the household 70% of pre-retirement income, which is considered an acceptable minimum level. To reach this savings goal this household would have to save 15% of every paycheck starting at age 35. But if the household planned to work to age 70—or started saving five years earlier—it would need to save just 6% of every paycheck.
In general, the typical middle-income household must save enough to produce a third of its retirement income. Low-income households need only get a quarter of retirement income from savings. High-income households (with a more expensive lifestyle) need to save enough to produce half their retirement income, the paper found.