Are Your Retirement Savings on Target?

Online calculators sometimes get it wrong.

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Employees aren't sure how much of their salary they should replace in retirement. As part of an online test on retirement income, MetLife Mature Market Institute and GfK North America asked, "What percent of preretirement income do experts think retirees need to use as a benchmark for determining the amount of annual income needed in retirement?" The chart below shows the responses of workers between the ages of 56 and 65 who plan to retire in the next five years.

They're right to be confused. There is no correct income replacement rate for everyone. An adequate level of income depends on retirement expenditures, retirement age, gender, asset allocation, and the percentage of savings that is annuitized, according to the Employee Benefit Research Institute.

Some economists doubt altogether the validity of the replacement rate calculations that many online calculators provide, saying that they often ignore variables that are impossible to predict, such as longevity, investment returns, and catastrophic healthcare costs that can derail all but the most sound retirement plans.

Human resources consulting firm Hewitt Associates released a report today saying that employees will need to replace, on average, an astonishing 126 percent of their final pay in retirement after inflation and medical costs are factored in. Most workers are on target to replace 85 percent of their income based on Hewitt's analysis of nearly 2 million employees at 72 large U.S. companies.

Nonetheless, a Government Accountability Office report found that some economists and financial advisers consider retirement income adequate if it replaces 65 to 85 percent of preretirement income. But you don't have to completely get to that number on your own. Social Security replaces, on average, 54.2 percent of wages for low-earning workers and 33.5 percent of income for high earners. To get to, say, a 75 percent replacement rate, you'd have to make up the difference of only 20.8 and 41.5 percent of income, respectively. And if you're lucky enough to have a pension, you can probably get by with saving even less.

Some studies have found that simply doing a calculation of your retirement-savings needs can put you on the fast track. But the GAO has much more dire predictions. Workers born in 1990 will have enough savings in their 401(k)-style plans to replace only about one fifth ($18,784 annually in 2007 dollars when savings are converted to a lifetime annuity) of their annual preretirement income, GAO projects. And 37 percent of workers born in 1990 will have no 401(k)-style savings at all.

That's better than the current crop of older workers but still not enough. Workers between 55 and 64 who have a 401(k)-style plan had a median account balance of $50,000 in 2004, which would provide an income of about $4,400 per year, replacing just 9 percent of income, on average, the GAO calculated.

Tell us, do you have a percentage of your preretirement income you're aiming to replace? Or do you just save as much as you can?