Why 1/2 of America Saves Next to Nothing for Retirement

Mark Wilson/Getty Images

Mark Wilson/Getty Images

It’s not how much money you make that counts; it’s how much you actually keep. A journey toward financial independence typically starts by saving money, even a small amount that helps build good habits and a cushion for your future self. Sooner, rather than later, an increase in savings is needed to reach your destination on time. Unfortunately, millions of Americans are not taking that next step.

Nearly half of Americans are placing virtually nothing aside for the future. According to a new Bankrate.com survey, 18% of respondents are saving nothing at all, while another 28% are saving no more than 5% of their incomes. Overall, fewer than one in four Americans are saving more than 10% of their incomes, including one in seven who are saving more than 15%. Nonetheless, the middle class ranks as America’s best savers, with more than one-third of households with annual income between $50,000 and $75,000 saving more than 10% of their incomes.

How much should you be saving for retirement? The most realistic answer is “it depends.” Everyone’s financial situation is different, which is why it’s called “personal finance” in the first place. However, the earlier you start saving, the less you’ll need to put aside every year to reach your goals. The longer you wait, the more you’ll need to save to catch up.

In order to provide some guidelines on saving for a successful retirement, the Employee Benefit Research Institute recently calculated the savings amounts needed at different contribution rates, salary levels, and ages for both genders, for various probabilities that they not run out of money to pay for average expenses plus uninsured health care costs throughout retirement. For simplification, the modeling currently excludes any net home equity or traditional pension income and does not factor in pre-retirement leakages or periods of non-participation.

A single 25-year-old man earning $20,000 per year needs a total contribution rate of approximately 6.8% of his salary each year until retirement at age 65 for a 50% probability of not running out of money in retirement. He needs a 16.5% contribution rate for a 75% success rate, and a 25% contribution rate for an 86% success rate. The same man earning $40,000 only needs to save 3% for a 58% success rate, while saving 6.4% provides a 75% success rate. A contribution rate of 14% provides a 90% probability of success. The analysis assumes a 4% nominal growth rate in wages, with a 6.5% real return for stocks and 2.3% real return for bonds. It also assumes the person starts drawing Social Security at age 65.

Since women tend to live longer than men, they require higher savings rates. A single 25-year-old woman earning $20,000 per year needs a total contribution rate of approximately 9.6% of her salary each year until retirement at age 65 for a 50% success rate, and a 20.5% contribution rate for a 75% success rate. The same woman earning $40,000 would have a 50% probability of success with just a 3% future contribution rate, but would need to increase it to 7.5% for a 75% success rate. A 15% savings rate is needed for a 90% success rate.

What happens if you start saving later in life? Under the same assumptions, a single 40-year-old man earning $40,000 and just started saving needs a 16.5% contribution rate for just a 75% success rate. A woman in a similar situation needs a 19.5% contribution rate for the same success rate.

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