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Retirement Savings Improve, but Not Enough

Woman counting change
Tom Grill | Blend Images | Getty Images
Woman counting change

Americans have made some headway with their retirement savings after the last few disastrous years. Nearly one-fifth of Americans (18 percent) are saving more for retirement this year than last year, according to Bankrate's August Financial Security Index.

When we asked this same question in 2011, 15 percent said they were saving more than the previous year — not a significant difference.

But the same proportion of people, 18 percent, say they are saving less than they did last year. That's actually much better than last year, when 29 percent of Americans said they were contributing a smaller amount to retirement savings than the previous year.

"The fact that people have stopped saving less is good — but are they saving enough? The data (are) showing, in aggregate, no," says Certified Financial Planner David Littell, co-director of the New York Life Center of Retirement Income and professor of taxation at The American College in Bryn Mawr, Pa.

The combined retirement income deficit for baby boomers and Generation Xers is estimated to be $4.3 trillion, according to a May 2012 report from the Employee Benefit Research Institute, or EBRI.

Starting younger is better

Ideally, people would increase retirement contributions every year, but they don't because it's very likely that most people have no idea how expensive 30 years of retirement will be.

According to a March 2012 report from EBRI, 56 percent of workers say they haven't calculated how much they need to save for retirement.

Calculating retirement income needs is the first step to establishing an effective retirement savings rate. It may be higher than you think, particularly if you're older than 30.

For instance, with 30 years to save for a 30-year retirement, someone with an investment portfolio split between 60 percent stocks and 40 percent bonds would need to save 16.62 percent of her income per year in order to replace 50 percent of her income in retirement. Those numbers are from the work of Wade D. Pfau, an associate professor at the National Graduate Institute for Policy Studies in Tokyo.

His findings were published in an article titled "Safe savings rates: A new approach to retirement planning over the life cycle," which appeared in the May 2011 issue of the Journal of Financial Planning.

Under the same circumstances, someone with 40 years to save would only need to put away 8.77 percent of his yearly income, according to the study.

Unfortunately, most Americans fall far short of that ideal. The median retirement account balance for Americans between the ages of 55 and 64 is $120,000, according to an analysis of the Federal Reserve's Survey of Consumer Finances by the Center for Retirement Research at Boston College.

"Now if you went and bought an inflation-indexed annuity, then that $120,000 is going to give you about $575 a month," says Anthony Webb, Ph.D., a research economist at the Center for Retirement Research.

Though Social Security will play a role, it only replaces about 40 percent of the average worker's income, according to the Social Security Administration.

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