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How Much Needs to be Saved for Retirement After Factoring in Post-Retirement Risks: Evidence from the EBRI Retirement Security Projection Model®

This paper helps answer one of the most important questions that many defined contribution participants face before retirement: How much do I need to save each year for a “successful” retirement? It begins with a brief description of EBRI’s Retirement Security Projection Model,® followed by the specific methodology utilized in this analysis. Results are provided first for the required contribution rates for those starting to save at ages 25, 40, or 55. The analysis includes three of the major post-retirement risks (longevity, investment, and long-term care) while allowing the participant to also choose the probability of “success” that is best suited for their circumstances. Given the assumptions used in this paper, a single male age 25 earning $40,000 with no previous savings would need a total contribution rate (employee and employer combined) of less than 3 percent per year until retirement (age 65) for a 50 percent chance of success. A 6.4 percent contribution rate would achieve a 75 percent success rate, and a 14 percent contribution rate would achieve a 90 percent success rate. But if a male earning $40,000 were to wait until age 40 to begin saving, he would need a 6.5 percent total contribution rate for just a 50 percent chance of success and a 16.5 percent total contribution rate for a 75 percent chance of success; a 90 percent probability of success would be impossible even with a 25 percent contribution rate. The next section is an analysis of the account balances required by ages 40 and 55 for those who have already been saving for retirement, showing how large a participant’s current account balance needs to be, by contribution rate, to be “on-track” for a particular level of retirement success. The final section summarizes the results for both analyses.