New guidelines help you figure how much to save before retiring

From a quintet with credentials comes the answer to a question that baffles working Americans:

How much do I need to save now to maintain my lifestyle in retirement?

The answer, in what is called a groundbreaking study, amounts basically to "it depends."

I am not trying to be cute. "It depends" has to be the answer, because how much you need to save depends squarely on how much you want to spend later, how much you've already saved, and how long you have before retirement, among many factors.

But the study, involving considerable analysis and number-crunching, goes beyond generalities to set specific savings guidelines.

"The study creates savings guidelines for typical individuals with different ages, income levels, and initial accumulated wealth so the public can more easily determine how much to save for retirement," the authors wrote.

The guidelines appear in the April Journal of Financial Planning, published by the Financial Planning Association, a professional membership group. They were developed by Roger Ibbotson, PhD; Peng Chen, PhD and chartered financial analyst; and James Xiong, PhD and chartered financial analyst, all from investment consultants Ibbotson Associates in Chicago, and by certified financial planners Robert Kreitler and Charles Kreitler in New Haven.

"We developed these savings guidelines with the hope they will be publicized, generally accepted, and that once people are aware of how much they should save they will better prepare for retirement," the authors said.

While the Journal is intended for financial professionals, the FPA is inviting everyone to read this study at fpanet.org/journal/articles/2007(underscore)Issues/jfp0407-art6.cfm.

Or go to fpanet.org and click on the link to Journal of Financial Planning at the top until you find the article.

One thing I liked is that the authors calculate their guidelines on so-called "net" preretirement income, or pretax income minus annual retirement savings.

The guidelines aim to replace 80 percent of that net income in inflation-adjusted dollars beginning, assuming retirement at age 65.

I'll give you an example. If you make $60,000 a year and save $6,000 for retirement, you are living on $54,000.

Under these guidelines, you would need $43,200, or 80 percent of $54,000 in retirement, not the larger 80 percent of $60,000. "You could say the more one saves, the less one needs to save," the authors quipped.

To be safe, I believe workers should plan on spending as much in retirement as they do now. But at least this study recognizes the fallacy of basing projected retirement-income needs on preretirement income, rather than on spending. And you can always bump up your savings rate to replace more than 80 percent of preretirement net income.

Some sample guidelines:

If you are 30, make $40,000 a year, and have no retirement savings, you need to start saving 10 percent of your income. But if you have $20,000 already saved, you need to save only 8.4 percent.

If you are 30, make $80,000 and have no savings, you need to save 13.6 percent of your income to maintain your lifestyle in retirement.

If you make $20,000, saving 7 percent would be enough. That's because Social Security replaces a higher percentage of income for lower-wage earners than it does for those who earn more.

The study also shows what the authors call the urgency of starting to save no later than age 35. At 35, if you make $60,000 a year and haven't started saving, you need to save 14.6 percent of income. Wait until age 55 and you'll need to sock away 32 percent of income.

At that point, delaying retirement may be the only realistic option.

Humberto Cruz is a columnist for the South Florida Sun-Sentinel. He can be reached at askhumberto@aol.com.