Vanguard long advised people to put 9% to 12% of their salaries—including the employer contribution—in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says.
Recently, Vanguard has begun urging people to contribute 12% to 15%, including the employer contribution, because of the stock market’s weak returns and uncertainty about the future of Social Security and Medicare.
Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080 a year for that median family. That leaves $39,465 needed from other sources. Most 401(k) accounts don’t come close to making up that gap.
The median 401(k) plan held $149,400, including plans from previous jobs, according to the Center for Retirement Research. To figure the annual income from that, analysts typically look at what the family would get from a fixed annuity. That $149,400 would generate just $9,073 a year for a couple, according to New York Life Insurance Co., the leading provider of such annuities— less than one-quarter of the $39,465 needed.
Just 8% of households approaching retirement have the $636,673 or more in their 401(k)s that would be needed to generate $39,465 a year.
Knowing exactly what is needed for retirement is difficult. But knowing what is a responsible amount is not. It is certainly no less than 8%, and is likely the 12-15% figure Vanguard recommends. If you start at 10% from the time you join the full time workforce (in your 20′s) then you have some flexibility you can see how thing look when you are 30, maybe 12% is sensible, maybe 15%, maybe 10%. If you fail to save for a decade however, you are likely to need to be at 15%, or higher.
Those of us in the USA live very richly (as do many of others in other rich countries and some others in countries that are not rich). We seem to think it is our right to live extremely richly and not have to save for retirement and then don’t want to accept the consequences of our decisions over decades of our lives to live for the day and not worry about the future. I don’t think that is a wise thing to do. The USA is not likely to generate enough excess economic benefit to just give it to those that didn’t save for retirement.
You may not want to save 12% of your income for retirement, but if you don’t you are taking a very risky personal financial strategy. If you decide not to, when you are in your 20′s and decide to in your 30′s good (you might well have to do more than 12% but still anything over 8% I think is a good start). But if you fail to save for 2 decades and you are in your 40s, you will have to save much more than 20% of your income, to be secure – most likely.
There are not that many obvious personal financial requirements for any sensible strategy. One is to have health insurance if you live in one of the few rich countries without coverage (the USA, for one). Another is to save an emergency fund. Another is to not buy things when you don’t have money. And saving in the neighborhood of 10% of your earnings (likely a bit more, and certainly more if you failed to do so as you started work) for retirement is another. Another is disability insurance.