Terrific article from FPA journal- savings guidelines

[meaghanchan]

Here's a link to a great article from the FPA journal on savings guidelines for individuals. It tells you how much you should be saving per year based on how much you make, how old you are, how much you have saved already, and how much of your income you want to replace.

FPA Journal - National Savings Rate Guidelines for Individuals

For example, a 25 year old with nothing saved who earns $40,000 a year and wants to replace 80% of his/her income should be saving 10% of their gross income for retirment.

A 35 year old with nothing saved who earns $60,000 a year and wants to replace 80% of his/her income should be saving 19.6% a year for retirement.

The journal authors are reccommending that their guidelines be publicized so that individuals can use them to plan for retirement. I'm curious as to what everyone here thinks of the article in general, and what you think of the guidelines.

[jIM_Ohio]

I read the first page.

I see a "flaw"- a minor one, but if the suggest a person save 19.6% to replace 80% of income, I think they in effect are replacing 100% of money they spend.

I'd prefer to see conclusions earlier in the material.

I started saving 6% at age 24 and I am doing just fine.

[meaghanchan]

Originally Posted by jIM_Ohio

I see a "flaw"- a minor one, but if the suggest a person save 19.6% to replace 80% of income, I think they in effect are replacing 100% of money they spend.

Actually, as I understand it, the amount they expect you to replace is based off your income after deducting your retirement savings- so if you make $100,000/ year and you are saving 20% for retirement, it assumes that you only need to replace $80,000. So you're replacing 80% of the $80,000 you're actually spending (taxes are included in that spending), or $64,000.

Here's their explanation:

"Third, we used a more sophisticated approach by using the retirement ratio of 80 percent based on pre-retirement net income as defined as gross income less retirement savings. We used net income because someone who saves for retirement has reduced their pre-retirement living expenses and, for most, it typically follows that they also reduce their post-retirement expenses. For individuals who are saving a lot, this can be significant. Lower retirement expenses means less needed capital. You could say the more one saves, the less one needs to save. The mathematics for calculating this can be relatively complicated. Appendix A explains how these calculations were done."

I'm saving more than they suggest, but the arguments I have towards the study are that they use what I consider to be a fairly optimistic rate of return for equities (11%) and they assume social security will still be around, which I also consider a fairly optimistic assumption.