How much is enough for a comfortable retirement? It’s a particularly vexing question, particularly now that the vast baby boomer cohort is beginning to realize that they aren’t going to die before they get old. Making matters worse, retirees must increasingly rely on their own self-directed savings rather than defined-benefit pension plans to fund retirement. On Thursday, Ibbotson Associates released its own savings guidelines for typical investors with different ages, income levels and initial accumulated wealth.
Ibbotson’s recommendations won’t surprise financial advisors, but might help inspire profligate clients. “The study demonstrates that achieving sufficient retirement income is possible with reasonable savings rates,” the authors of the report write. “Not surprisingly, there is a premium on starting early. Those who do save early can save without a significant drop in lifestyle. A critical inflection point occurs at age 35 to 40. Those individuals starting their retirement savings after that age face the challenge of an increasingly higher savings rate needed to accumulate sufficient capital.”
Ibbotson assumed retirement would fall at age 65 and that cash flow needed in retirement would be equal to between 60 and 80 percent (replacement ratio) of pre-tax, pre-retirement gross income at age 64. It included annual inflation assumptions of 2.5 percent, but did not account for medical costs that might be required late in life.
The report includes several tables showing the savings rates for different gross income levels with 60 percent and 80 percent replacement of gross income, as well as savings rates for 80 percent replacement of net income, plus the deductions that can be made for every $10,000 of savings already in the individual’s portfolio.
For the full report and tables, click here:
Ibbotson used Monte Carlo simulations to project pre-retirement portfolio returns. The group stressed that the guidelines are meant to serve as a starting point for investors and financial advisors in creating retirement plans.
To create its guidelines, Ibbotson made certain assumptions about the individuals saving for retirement. For example, that people invest their savings to match the asset allocation of a typical age-appropriate target maturity fund; that investment fees are not taken into account when calculating performance; that the ending wealth value needed for retirement is the monetary sum it would take to buy an inflation-indexed lifetime annuity that would cover the difference between Social Security payments and 80 percent of net pre-retirement income; Social Security benefits are based on calculations that the Social Security Administration posts on its Web site; the savings rate is for an individual rather than a couple; and investors’ income is assumed to increase with inflation.