News from the Tennessee Valley Business
SUNDAY, JULY 8, 2007

More people need to save funds for retirement

By Eileen Alt Powell
AP Business Writer

NEW YORK — It has long been taken for granted that if you save 10 percent of your income through your working life, you’ll have plenty of money for a comfortable retirement.

Now experts are beginning to suggest more is needed because inflation continues to nibble away at spending power, health care costs have soared and today’s workers are living much longer than their ancestors.

The need to save more is not a message most Americans want to hear — especially since 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. The most recent government data shows the savings rate at a negative 1.4 percent of personal income in May.

The 10 percent savings goal may still work for a very small group — those who start putting money aside for retirement in their early 20s never waiver, said Dallas L. Salisbury, chief executive officer of the nonprofit Employee Benefit Research Institute in Washington, D.C.

“If somebody starts when they get their first job and they save give or take 10 percent 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 says, is that most people don’t make saving for retirement a priority when they’re that young. Nor are they that diligent.

The reason is that someone who starts saving later doesn’t get full advantage of the compounding of interest over time.

So someone who starts saving at 40 probably needs to set aside more than 20 percent of income, while someone who starts saving at 50 may be looking at 35 percent of more, he estimated.

Those figures may seem outrageously high, but Salisbury points out that many people can expect to spend 20 or more years in retirement. Retirement calculators at the EBRI-sponsored site help families evaluate their individual situations.

Bruce D. Harrington, vice president for product development with MFS Investment Management of Boston, said another way a worker can try to determine how much to save is by projecting how much he or she will likely spend in retirement.

There are two schools of thought on projecting these so-called replacement ratios, he said. One suggests people are likely to spend in retirement the equivalent of about 70 percent to 80 percent of the income they earn in their final five working years.

The other suggests people may need 100 percent or more — a goal Harrington believes is more advisable.

“Life expectancies continue to rise, so it’s no joke that the average person could live 20 or 30 years in retirement or more,” Harrington said.

Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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