Even with Social Security, most Americans need to save well in excess of 5% of our income. But we don't.
How much money are you saving for retirement? If you're a savvy saver, then you know one of the best ways to do so is to have some percentage of each paycheck automatically placed into a savings plan. You can often defer paying taxes on savings that way, and some companies even match some portion of your savings in a 401(k) or other retirement plan. But how much of each paycheck should you be saving to retire at a reasonable age? Unfortunately, the number is different for everyone, but there's little doubt that most Americans aren't saving enough.
It always helps to think about saving with some historical context. Here's a chart showing the portion of personal income that Americans have saved since 1959, according to the Bureau of Economic Analysis:
You can see that saving grew to be at or above 8% until the 1980s. During that decade it declined to around 6%, before moving to 4% in the 1990s. In the last decade, it went even lower, but has rebounded recently, settling at around 5%.
Through a little financial analysis, it's pretty clear that this 5% savings rate is woefully inadequate for most Americans, no matter what career stage they are in, if they hope that savings will produce an adequate income after the age of 65. Social Security may help, but necessary deficit cutting over the next several years could dampen its impact. Even at Social Security's current rate, however, most Americans need to save well in excess of 5%.
How much you need to save is determined by a number of variables. First, it depends on your age, when you intend to retire, and how many years you estimate you will live. You also need to decide how much money you want your savings to provide each year during retirement. Then, you must make assumptions about the rate of inflation and the rate of return on your savings.
So how much you should save can't be summed up in a quick article, because it's different for everyone. But let's consider an example to get an idea of a minimum that might be required. So we'll start with a 22-year-old college grade named Fred. He just got a job making $50,000 -- the average starting salary this year for college grads, according to the National Association of Colleges and Employers. Fred wants to retire when he's 65 years old. He also wants his retirement income derived from savings to match his starting income out of college, after adjusting for inflation. Now let's make some assumptions about the future:
1) Inflation will be 3.5% per year (reasonable, as it's been 3.7% since 1950).
2) His compensation will increase by 3.5% per year, on average (reasonable, since average wage growth has virtually matched inflation since 1979).