How to Calculate Your Retirement Number

A new study examines how much you need to save each year for a comfortable retirement.

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It’s difficult to determine exactly how much money is enough to retire comfortably. Households earning $50,000 or more will need about 80 percent of their pre-retirement earnings to maintain their current standard of living in retirement, according to a new Center for Retirement Research at Boston College report.

How much you need to save to replace 80 percent of your working income in retirement depends largely on the age you start saving and when you retire, the researchers found. “Starting early and working longer are far more effective levers for gaining a secure retirement than earning a higher return,” according to the report.

[See The Magic Numbers of Retirement Planning.]

But you don’t have to replace 80 percent of your current salary on your own. Social Security payments will get you part way there. Workers need the save the amount they will need beyond what Social Security provides.

Consider a 25-year-old worker who earns $43,000 and wants to retire at age 67 in 2052. Social Security will replace 41 percent of his earnings in retirement, so he has to save enough to replace 39 percent of his working income. If he wants to spend down his savings at a rate of 4 percent per year he will need to save $660,000 by 2052 to maintain his current level of consumption in retirement, according to Boston College calculations.

How much he needs to save each year to hit his retirement goal depends on when he starts saving. If he begins contributing to a 401(k) at 25 and earns a 4 percent real return annually, he will need to save 12 percent of his earnings each year. If he waits longer to begin to build a nest egg this number jumps to 18 percent of pay annually starting at age 35 and 31 percent of his salary if he doesn’t save anything until age 45. “Starting to save at age 25, rather than age 45, cuts the required saving rate by about two thirds,” write Boston College researchers Alicia Munnell, Francesca Golub-Sass, and Anthony Webb.

[See 10 Key Retirement Ages to Plan For.]

Saving enough to retire comfortably gets a little easier if you are willing to push back your retirement date by a few years. If this retirement saver works until age 70, he could save as little as 7 percent of his pay each year beginning at age 25 and still cover his likely retirement expenses. And even if he waits until age 45 to start saving, he’ll reach his goal by saving 18 percent of each paycheck for retirement. “Delaying retirement from age 62 to age 70 also reduces the required saving rate by about two thirds,” Boston College found.

Postponing retirement allows workers to claim larger Social Security checks, which reduces the amount they must save on their own. Retiring later also gives people additional years to contribute to their 401(k)s and accumulate interest and shortens the number of retirement years they need to finance.

[See 401(k) and IRA Changes Coming in 2012.]

Workers can maintain their current level of consumption on 80 percent of their working income in retirement largely because they pay less in taxes, Boston College reports. Retirees no longer pay Social Security and Medicare payroll taxes and pay lower federal income tax because only a portion of Social Security benefits are taxable. They also no longer need to save for retirement or pay for work-related expenses such as clothing and transportation.

Twitter: @aiming2retire