How much income do people need to stash in their 401(k)s to assure a successful retirement?

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The nonprofit Employee Benefits Retirement Institute has come upwith some new figures based on its Retirement Security ProjectionModel, which, it says, goes further than merely rely on replacing apercentage of income to pinpoint savings goals.

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RSPM modeling accounts for longevity, postretirement investmentrisk, and nursing home costs, items and factors most otherequations don’t consider, according to Jack VanDerhei, EBRI’sresearch director.

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EBRI describes a “successful retirement” as one in which aparticipant can afford to pay for average retirement expenses,including uninsured health care costs. Home equity wealth anddefined benefit pension income are not calculated in itsestimates.

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Its new analysis examined the savings needs of single men andwomen – which differ given women’s longer life expectancies – andestimated deferral needs for those starting to save at ages 25, 40,and 55.

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A 25-year-old single male earning $40,000 a year who contributes3 percent of his salary over his career would have a “50-50” chanceof income adequacy, according to EBRI’s calculations.

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If he saves 6.4 percent, that probability jumps to 75percent.

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The 40-year-old making the same salary would need to defer 16.5percent of earnings to have a 75 percent chance of success. A40-year old female would need to save about 19 percent to have a 75percent chance of not running out of money in retirement.

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A 55-year-old with no savings would need to defer about aquarter of his $40,000 salary to have a 50-50 chance of retiringwith adequate savings. A female of the same age and deferring thesame amount would only have a 41 percent chance of not running outof money.

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Beyond suggesting how much savers need to be putting away, thenew analysis models different account balance levels relative toage. In doing so, participants can estimate what future deferral requirements will be needed to stay on trackfor a successful retirement.

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“In essence, this allows one to pick which of three contributionrates they are most likely to choose for the future and then seehow large their existing account balance would need to be at thatage,” explained VanDerhei.

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If the EBRI’s modeling is accurate, not all of the news isbad.

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Take the instance of the single 40-year-oldmale making $65,000 a year and expecting to defer 9 percent of hissalary into a 401(k) plan. Even if at 40 he only had $4,600 inexisting savings, he stands a 90 percent chance to have asuccessful retirement after deferring at that rate.

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Obviously, the closer to retirement, the more existing savingsare needed to reach the highest probability of retiringsuccessfully.

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A 55-year-old male making $65,000 a year and who has over$272,000 in savings can defer as little as 4.5 percent of salary toreach the highest probability of retiring successfully.

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The 55-year-old woman who wants to only defer 4.5 percent wouldneed almost $300,000 in existing savings to achieve a 90-percentchance of retiring successfully.

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