A Number to Remember: 15.7
Retirement and 401k planning can be incredibly complex. Or not.
We are big fans of keeping things simple whenever possible with easy to understand rules of thumb. That’s why we were pleased to see a new report from Hewitt Associates that includes some well researched guideposts for retirement planning. Based on analysis of the retirement needs of 2.1 million employees at 84 large companies, the study finds that for employees who currently contribute to their employers retirement plan:
- on average will need to accumulate a retirement resources equal to 15.7 times times their pay at retirement to maintain pre-retirement living standards (e.g. $785k for a $50k salary)
- Social Security will provide, on average, retirement resources equal to 4.7 times pay
- other retirement savings – such as 401k’s and DB pensions – will need to provide the remaining 11 time pay
- only about 18% of these employees are presently expected to satisfy 100% of their needs at retirement
- on average, workers who rely solely on a defined contribution plan to fund their retirement are projected to meet just 74% of their needs in retirement
Next time you ponder the question: How Much Should I be Saving for Retirement?, keep in mind the 15.7 factor. It’s a well-researched yet simple way to target the retirement nestegg you need to work towards accumulating.
The 15.7 times salary is mind-boggling. Most working Americans will never be able to accomplish that, especially at current 401K balances for people 45 years old and up. My gosh!
What is a good way to factor in equity in a house? Particularly if you want to stay in the house and use up equity at a sensible rate.
Perhaps a good online reverse mortgage calculator (there are lots out there). A reverse mortgage is one way that home equity can be factored into into retirement planning/funding. This report may be of interest to you: http://crr.bc.edu/images/stories/factsheets/2.pdf
This is similar to most finance articles, put an amount that is so mind blowing that everyone gets frustrated and gives up trying. My thoughts are if you need to maintain your income through your retirement ages, you are in trouble. i.e. still have a mortgage, car loan, credit cards going into retirement. You should look at this of a percentage of your last salary that you plan to maintain through retirement.
I can see the 15.7 if the “salary” is a net figure (net of taxes, 401kcontributions, Soc.Sec.etc.). A gross salary of $125,000 would require an innordinate amount of money vs. a take home pay of say $65,000 .
I’m looking for a retirement calculator that takes into account a couple’s needs, not just a single person. Additinally, the calculator shouldn’t start with salary, but rather current spending. Since my current spending includes saving into my 401(k) (same for my husband), I shouldn’t have to consider replacing that in retirement. Any ideas?
Your savings in 401k is not spending.
When I retire I will receive a 54% pension. How do I calculate that into the 15.7?
OK. The number 15.7 is an easy number to grasp, but how would one calculate the value of a “retirement resource”? It says Social Security provides an average of 4.7, how can I figure a pension’s retirement resource value?
@Jerry and Mike -
Your questions are similar. Every pension has a “net present value” or lump sum equivalent. When you retire, you’ll likely get a choice of taking a monthly pension or a lump sum payout. (Most people take the lump sum, but you’d almost always be better off with the guaranteed monthly pension.)
Pre-retirement, your human resource office or pension administrator should be able to give you a good idea of the lump sum value of your projected pension. Alternatively, you can use this How Long Will My Money Last calculator to see approximately how much your pension’s lump sum value is. Adjust the “starting balance” amount until the monthly withdrawal approximates what your monthly pension will be. Keep thing simple by assuming 0% inflation, no contributions, etc.