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What Savings Rate?

CONVENTIONAL WISDOM says those in the workforce should save 10% of their pretax income. But this is a number that each of us will likely want to adjust up or down—for four reasons.

First, this 10% savings rate is the amount often suggested for retirement savers. What if we have other goals, such as buying a home or putting the kids through college? These other goals would require additional savings, and we might find our total savings rate should be more like 15% or 20% of income.

Second, our employer might contribute toward the cost of our retirement, either by funding a pension plan or by matching our contributions to the 401(k). Let’s say our employer kicks in 50 cents to the 401(k) plan for every $1 we contribute, up to 6% of pay, so we could potentially get 3% of pretax income as an employer match. That means that, to hit a 10% retirement savings rate, we only need to save 7%.

But is 10% enough? That brings us to our third reason: With stock valuations rich by historical standards and bond yields so low, many observers think investment returns will be modest in the decades ahead. To compensate, we might aim not for a 10% total retirement savings rate, but perhaps 12% or even 15%.

Finally, this retirement savings rate assumes we can sock away money regularly throughout our career. But what if we find ourselves out of work for extended periods? To give ourselves a financial buffer against future misfortune, we might save even more today. What if all goes smoothly with our career? We could find ourselves with an especially comfortable retirement—or perhaps the option to retire early.

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