Dear Gail,

I’m 38 and newly-divorced. My ex and I had no kids (thankfully), but the break-up was none-the-less devastating, both emotionally and financially. About all I’ve got left is what’s in my 401(k) and IRAs- about $40,000.

It’s going to take awhile before I’m ready for another relationship, but I’m determined to get my finances back on track. Trouble is, I have no idea if I’m saving enough. I’ve read one article that said you should save anywhere from 8-10 percent of your income but another one claimed that Americans are over-saving!

I make about $62,000 (pre-tax). I haven’t had much luck with online retirement calculators because they don’t seem to account for the fact that you’ve already got some money saved.


Dear Brad,

I’m sorry to hear about your painful divorce, but encouraged that you are starting to think of your future.

Uncertainty about what is the “right” amount to save for retirement has prevented a lot of people from even starting. Having tried a number of online calculators myself, I’m also convinced that the “nest egg” numbers they generate are so huge (ie: “You will need $1.2 million by the time you are age 65!”) they also discourage folks.

Fortunately, help has arrived. The folks at Ibbotson Associates, one of the most respected authorities on the financial markets, have come up with a set of “National Savings Guidelines for Individuals.”

Applying K.I.S.S to Financial Planning

It all started with Bob Kreitler, a Raymond James financial advisor in New Haven, Connecticut. “I was at a point in life where I [wanted] to give something back. In looking at the lack of savings in this country, I thought that one of the reasons was that people don’t have information on what they should do [with their money],” he says.

Decades spent as a financial planner had taught Kreitler that most folks are easily overwhelmed by the calculations associated with long-range planning. He envisioned a set of universal guidelines that would tell you how much to save. The key, he realized, would be to make sure that whatever they came up with was “ultra simple.”

Kreitler enlisted the help of the Financial Planning Association. Together they challenged Roger Ibbotson to apply the brainpower at the firm he founded to come up with a solution.

The result is a chart that shows how much you should save each year based on your age, current income, and standard of living. It allows you to reduce your annual savings by taking into account any retirement money you’ve already set aside. These guidelines were published in the Journal of Financial Planning this past spring. (1)

Go Figure

Start by locating the age closest to yours. For your sake, Brad, I’ve reproduced the portion of the National Savings Guidelines that applies to someone age 40:

Age---Income---------------------Savings Rate-------------------Deduction per $10,000 Saved
40-----$20,000---------------------10.2 percent-----------------------1.67 percent
40-----$40,000---------------------14.8 percent-------------------------.86 percent
40-----$60,000---------------------17.6 percent-------------------------.57 percent
40-----$80,000---------------------19.8 percent-------------------------.42 percent
40---$100,000----------------------21.4 percent------------------------.35 percent

Next, find the Income level that is closest to your gross (total) income. In your case, Brad, that would be $60,000.

If you have zero retirement savings, the number in the “Savings Rate” column tells you what percentage of your gross income you should be setting aside. For instance, a 40-year-old who earns $60,000 should save 17.6 percent of that, or $10,560 per year.

The new twist Ibbotson and Associates has added is the last column, which tells you how to adjust your savings rate based on the amount already sitting in retirement accounts.

For every $10,000 in savings you have, you can reduce your annual savings rate by .57 percent. Since your 401(k) and IRA money total $40,000, Brad, you can reduce your annual savings rate by 2.28 percent (4 x .57 percent) Thus, instead of $10,560, you only need to be salting away $9,192 per year.

Notice that the higher your income, the more you need to save. That’s because as income goes up, so do lifestyle expectations and, thus, the amount of income one will require in retirement. However, since Social Security benefits are capped at a certain dollar amount, as your nest egg target rises, Social Security represents a smaller portion of your total income. As a result, you have to save more in order to make up the difference.

While it seems contradictory, it is also true that the more you save, the less you have to save. “Because if you’re saving more, you’re living on less,” explains Kreitler. “Once you retire, you want 80 percent of that."

The Numbers Behind the Numbers

By necessity, there are a number of assumptions built into these guidelines. The first is that your retirement goal is the amount needed to generate 80 percent of your current net income when you retire. (2) “Net” income in this case means your gross income minus your annual savings. This is the amount of money you are actually living on.

These calculations assume that inflation averages 2.5 percent each year and that your gross income increases at the same rate as inflation.

The creators of the guidelines also count on you to do something other than stick your savings in a bank account. It’s assumed your money is invested in a combination of U.S. stocks, bonds, and cash that is appropriate for your age based on the average asset allocations found in so-called “life-cycle” mutual funds.

As Good As It Gets

Even if you diligently save the annual amount recommended, there is no guarantee you’ll end up with a sufficient retirement. The savings guidelines aim for a 90 percent probability that you’ll accumulate the nest egg you’ll need.

Still, as Roger Ibbotson explains, following the recommendations should stack the deck in your favor. “Our numbers are very conservative. We’re not saying that on average you’ll have enough money, but that in the worst case you’ll have enough.”

That is, even if your investment returns are sub-par, there’s just a 10 percent chance you won’t have enough money by the time you retire.

Ibbotson is quick to point out that the numbers produced by this chart are a “rough” estimate and that you need to revise your savings rate based on changes to your age, savings and income. If you want more specific recommendations you should consult a financial advisor who can produce a customized plan tailored to you.

The Great Savings Divide?

A somewhat startling finding of the Ibbotson research is that there is an age at which saving for retirement virtually becomes a point of no return: 35-40. That’s because if you haven’t set aside anything by then, the annual amount you need to save gets so large it becomes, at best, impractical or, at worst, impossible:

“Individuals who start saving for retirement after age 35 face the challenge of an increasingly higher savings rate needed to accumulate sufficient capital. For example, the recommended savings rate for a person starting to save at age 25 typically more than doubles if he or she waits until age 45 to start saving, and triples at age 55.”

This isn’t to say that later-saving baby boomers should throw up their hands and not save a dime. The fact is, it’s always better to have some savings. But those who start later in life will have to be extremely disciplined in order to make up for lost time.

For instance, if you’re age 55 and have gross income of $80,000, your annual savings rate is 36.6 percent, which amounts to $29,280. Most people would be unwilling or unable to reduce their current lifestyle in order to set that much money aside.

The reality is, if you’re a late-comer to the retirement savings party, short of winning the lottery or robbing a bank, you’ve got two choices: retire later (work longer) or reduce your income need (lower your expectations about the lifestyle you’re going to be able to afford when you retire).

These guidelines aren’t perfect. You may disagree with some of the underlying assumptions. For instance, even though the age at which tomorrow’s retirees can collect their “full” Social Security benefits will be 66-67, the creators of the guidelines assume you will retire at age 65.

Still, despite their flaws, these guidelines get major kudos for finally providing a specific answer to the question, “How much should I save?”

“People just aren’t saving enough,” says Ibbotson. Echoing Kreitler, he adds, “Part of the problem is they don’t know what amount to save. We felt that if they had clear-cut guidelines they’d know what to do.”

No more excuses!

Hope this helps,

1. You can find an interactive savings calculator by going to and then clicking on “Personal Finance.” (Morningstar now owns Ibbotson Associates.) The income and age ranges in this online calculator are more limited than the chart.

Warning: Be sure to use the “Retirement Calculator” on the Personal Finance page. For some annoying reason, Morningstar has placed ads for several other retirement calculators on the same page. (Very confusing)

2. Eighty percent is just a rough estimate. Typically, your expenses decline when you retire. For instance, you’re not buying work clothes or spending money on commuting to and from your job, your dry-cleaning bills go down, etc. However, a number of new retirees report that their expenses went up after they retired because they took up new activities, traveled a lot, etc. If you think your retirement income need will be higher, you’ll need to increase your savings percentage.

If you have a question for Gail Buckner and the Your $ Matters column, send them to:, along with your name and phone number.