PLANSPONSOR - October/November 2018 - 24

Upfront
Why Should Participants Save 15%?
THERE seems to be a consensus among
those in the retirement plan industry
that individuals should save 10% to 15%
of their salaries in order to have a secure
retirement. What was the origin of this
suggested savings rate?
Katie Taylor, vice president of thought
leadership at Fidelity, says her firm used
to suggest a 10% savings rate, but, since
delving deeper into the numbers, it recommends
that people save 15%-including
both employee savings and contributions
from employers.
Roger Young, senior financial
planner at T. Rowe Price, says his firm
also advises a 15% savings rate. " There
is mathematical backing to what we
suggest, " he says.
According to Young, the 15% suggestion
is something T. Rowe Price has
analyzed, starting with a model of what
amount of income people need to replace
in retirement. Its model factors in what
individuals currently spend, what they
are likely to spend in retirement, taxes in
retirement and the fact that individuals
may stop saving once no longer employed.
" We assume people need to replace
70% of their income in retirement, which
could be different, based on whether
spending habits change. Then we look
at how much income Social Security will
replace, which could also vary heavily by
income and marital status, " Young says.
" We also assume a beginning withdrawal
rate of 4% per year. There is a lot of back
and forth of opinion on whether this is
reasonable, and, though it's not a fail-safe
number, we believe it is reasonable. "
Other assumptions T. Rowe Price
makes are that the pre-retirement investment
return is 7% before taxes and that
income grows over time. " We tried not to
be too aggressive in our assumption about
what people can save early in their career,
so we assume people start to save at age
25, beginning with 6% of income and
increasing over the years, " Young says.
The company arrives at a suggestion
of what multiple of income an individual
needs to have saved by a certain age, and
what percentage of income he needs to
save, to reach that multiple.
Similarly, after analyzing reams
of national spending data, Fidelity
concluded that most people will need
somewhere between 55% and 80% of
their employment income to maintain
their lifestyle in retirement. However,
realizing that Social Security will
provide much of that income for many,
the company concluded that 45% of that
24 PLANSPONSOR.com October-November 2018
Art by Jackie Ferrentino
replacement income will come from
people's personal savings, Taylor says.
" Fidelity has done modeling, and,
in our point of view, a goal of saving 10
times final income is applicable for people
who make $50,000 to $250,000 per year,
which covers between 85% and 90% of
workers based on our market share of
participants, " Taylor adds.
Fidelity's estimate is assuming individuals
save for retirement from ages 25
though 67. If people start saving later
or have a gap in saving, the 15% annual
savings rate will need to be increased to
reach the goal. For example, if a 40-yearold
has saved none of his income for
retirement, he will need to save 22%
per year to reach the appropriate income
replacement goal.
But is 15% the right savings rate for
everyone? There are caveats. People who
expect to be making over $250,000 at
retirement age may need to save more
than 15% of income to have their desired
lifestyle in retirement, Taylor says. On
the other hand, those who expect to be
making under $50,000 when they reach
that age may need to save less, in part
because Social Security will replace a
higher percentage of their pre-retirement
income. -Rebecca Moore
http://www.plansponsordigital.com/plansponsor/october-november_2018/TrackLink.action?pageName=24&exitLink=http%3A%2F%2FPLANSPONSOR.com
PLANSPONSOR - October/November 2018

Table of Contents for the Digital Edition of PLANSPONSOR - October/November 2018
