It has long been taken for granted that if you save 10 per cent of your income through your working life, you'll have plenty in the pot for a comfortable retirement. But that's no longer so, retirement experts are now warning.
A combination of inflation nibbling away at spending power, the soaring cost of health care, longer life expectancy and more irregular working patterns have made the 10 per cent calculation largely irrelevant, and those who rely on it dangerously complacent, the Washington-based non-profit body the Employee Benefit Research Institute has said.
It is a message many Americans will not want to hear, particularly as the nation's savings rate has been negative since the second quarter of 2005, meaning that people are spending more than they earn and either digging into their savings or building up their debt, said the institute.
While the 10 per cent savings goal may still work for a very small group – those who start putting money aside for retirement in their early 20s never waiver – for the rest of us it will just not be enough, warned institute chief executive Dallas L Salisbury.
"If somebody starts when they get their first job and they save give or take 10 per cent for 45 years ... then, by most any model, they will have accumulated enough money so they won't run out of money before they run out of life," he said.
But the reality, Salisbury added, was that most people did not make saving for retirement a priority when they were that young. Nor were they that diligent.
"The mantra has always been about starting to save early," Salisbury said. "People don't naturally flip that and say, 'wait a minute, if that happens, doesn't it mean that if I start late, I have to do a whole lot more to catch up?'."
As those who start later do not get the full advantage of the compounding of interest over time, someone who only starts saving at 40 probably needs to set aside more than 20 per cent of income, he calculated, rising to 35 per cent for someone starting in their 50s.
This is compounded by the fact that many people will now have to live much longer on their retirement savings, in many cases as long as 20 years.
Bruce D Harrington, vice president for product development with Boston investment management firm MFS Investment Management, said workers needed to determine how much to save by projecting how much they will be likely to need to spend per month or year in retirement.
"Life expectancies continue to rise, so it's no joke that the average person could live 20 or 30 years in retirement or more," he said.