How Saving Early And Long Pays Off


Should I recommend a specific retirement savings amount or asset range that is likely to last for the client’s lifetime? Should I center a plan around a withdrawal rate for the client to use once retirement starts? Should I build out a plan on ballpark spending assumptions based on the general population?

Agents and advisors in the retirement income market discuss these and related questions non-stop, and convictions about the answers vary considerably. After all, experts use different benchmarks, business models and resources.

Now here comes still another approach. This one is courtesy of Prudential. It focuses on the savings rate that people in a workplace retirement savings plan need in order to achieve a more secure retirement.

Here goes: On average, Prudential said in a recently-published paper, 35 percent of retirement income should come from a 401(k) or other retirement savings plan. This is based on data in the latest National Retirement Risk Index published by The Center for Retirement Research at Boston College.

That’s not all. The researchers found that the average required savings rate to achieve the targeted income is 14 percent. This assumes that saving start at age 35 and retirement starts at age 65.

Seeing such a big percentage might spook some workers — for instance, workers who lost their jobs during the 2008–2009 recession and who have only recently found new steady employment.

But the researchers don’t fixate on that one number. In a single-income household, they said, if the individual starts saving at age 25, instead of age 35, the average earner’s savings rate would be only 10 percent. Alternatively, if saving starts at age 35, the average savings rate could be just 12 percent if retirement doesn’t start until 67, or it could be just 6 percent if retirement doesn’t start until 70.

The percentage gets even smaller if the savings window stretches out for 45 years, from age 25 to 70: The average savings rate would then be just 4 percent.

Even if other researchers quibble over fine points in the research, the overall message has all the earmarks of good old common sense.

As Prudential senior vice president James McInnes put it, “This research shows it is never too late to start saving, and even if you didn’t begin at age 25, saving a little more now or extending retirement can still get you to a comfortable place.”

The Employee Benefits Security Administration has a similar message on its website: “Start saving early. For every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up.”

Albert Einstein, the late great theoretical physicist, had the same idea. He is credited with describing compound interest as the eighth wonder of the world, because when interest is allowed to compound over time, the account value achieves handsome growth.

The nut the retirement income industry needs to crack is, how to get more Americans to listen up and save-early-and-long.

That’s important to figure out, considering the 2014 Retirement Confidence Survey finding from the Employee Benefit Research Institute (EBRI) and Greenwald Associates regarding minimal savings. The survey found that six out of 10 workers have less than $25,000 in total savings and investments, excluding their homes and their defined benefit plans. Imagine, less than $25,000.

Today’s employer-sponsored plans certainly do their bit to help spur savings. They offer tax-deferral, employer match and payroll deduction, along with auto support (enrollment, escalation and rebalancing), financial education, calculators and income estimators.

But maybe something more is needed, such as having a benchmark savings rate to display, one based on modeling of American household trends. Retail retirement advisors might find that information useful too, especially for clients who begin to backslide on their planned savings. Sometimes monkey-see, monkey-do works.


Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Connect with Linda →

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