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The Short Answer

Are You Saving Enough for Retirement?

Building a margin of safety into your savings rate can be a smart move.

One of the most vexing and controversial questions in planning for a financially secure retirement has to do with how much to save during your working years to maintain your standard of living in retirement. Fortunately, most retirees can live just as well on less than they made while they were working. Various studies suggest income "replacement rates" (typically defined as a percentage of your final working year's salary that would be required to maintain your standard of living) in the 60% to 80% range, with some advisors suggesting full replacement.

However, even with recommendations of income replacement well shy of 100% of preretirement levels, many investors still struggle to save enough in their working years, risking an inadequate retirement nest egg. In fact, a study published by the Center for Retirement Research at Boston College argues that up to 43% of American households are at risk of falling short of what they'll need in retirement. There are many reasons for why investors fail, some within their control and others not. And while we've written about the crucial questions investors need to ask about their retirement savings, we'll focus here on one factor you can control--your actual savings rate.

Using Morningstar's Retirement Savings Calculator
On the Personal Finance page of Morningstar's Web site you'll find our Retirement Savings Calculator, which was introduced earlier this year and is based on the innovative research of Ibbotson Associates, a unit of Morningstar. The designers of this tool sought to improve on existing retirement savings rate estimates in two important ways. First, they calculated the income one would need in retirement based on a percentage of net-pre-retirement income. In other words, they take into account the fact that while in retirement investors no longer need to save for retirement and thus require a reduced amount of income. Second, when estimating the savings rate required, the researchers used dynamic Monte Carlo simulations and Ibbotson asset class return forecasts. These improvements can hopefully help account better for the range of possible investment outcomes one might experience.

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