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How Much to Save

Two of the most common questions people ask about retirement planning are, “How much should I save?” and “Am I on track with my accumulated savings?” These are difficult questions to answer because everyone’s situation is different. However, we can provide some general guidelines that might be helpful.

The first step is to estimate what percentage of your current income you would like to have during retirement, which is referred to as your replacement rate. For example, if your current annual income is $100,000 and you plan to live on $40,000 per year during retirement, your replacement rate is 40%. Replacement rates are generally less than 100% of preretirement income because spending declines with age and saving for retirement is no longer necessary when you are already retired. Two economic researchers recently analyzed retirement savings rates using Monte Carlo simulations and historical stock market data to determine how much you should save each year, expressed as a percentage of your annual income, to reach your future retirement goals.1 Based on this analysis, a 30 year old investor should save about 15% of her income each year to achieve a target replacement rate of 40%. However, if she waits until age 35 to start saving for retirement, she would need to increase her annual savings rate to 19% of her income. On the other hand, if she begins saving at age 25, she would only need to save 13% of her income each year.

How can you tell if you’re on track with your retirement savings? The same investigators developed a useful metric to gauge where you stand relative to your retirement savings goals, which they termed the asset-income multiple. This is calculated simply by dividing your accumulated financial assets by your current income. The higher this number, the greater your likelihood is of achieving your target retirement income. Assuming a retirement age of 65 and a replacement income of 40%, a 35 year old investor would be right on track with an asset-income multiple of 1.0. However, this is strongly influenced by your investment time horizon. A 45 year old, with 20 years to go before retirement, should have an asset-income multiple of 3.8, and a 55 year old, should have a multiple of 7.5. If your asset-income multiple exceeds your target number (adjusted for your age), you are in good shape and ahead of schedule with your retirement savings. If your multiple is below your target number, you have some catching up to do, which means investing a higher percentage of your income each year.

The authors of this study came to a few conclusions that align well with our recommendations for successful retirement savings. First, an early start makes it much easier to achieve your goals and provides greater financial flexibility later in life. On the other hand, missed savings opportunities early on require high savings rates as you get older. Second, saving consistently, without long lapses, increases your chances for success. Finally, it is important to monitor your progress over time and, if necessary, adjust the percentage you save each year to maximize your chances for success.

If you’d like some help using these tools to analyze your own portfolio, please let me know. As always, I would be happy to answer any questions.

Jeffrey J. Brown, MD CFA Principal, Shearwater Capital


1. De Santis M, Lee M. Income-based saving rates. Dimensional Fund Advisors, June 2013

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