How to Close Your Retirement Fund Gap

Here's the new retirement "number" to focus on: 15.7

Multiply your estimated final salary by 15.7. That's how much you'll need to live comfortably in retirement, according to benefits consulting firm Hewitt Associates. And just to point out what is hopefully -- if painfully -- obvious, Social Security isn't exactly going to do the heavy lifting here. Hewitt calculates that Social Security will kick in just 4.7x your final salary. So assuming you don't also have an old-fashioned pension to fall back on, that leaves you on the hook for providing the other 11x your final salary. (An important side note: in addition to factoring in inflation, Hewitt's study also accounts for the high price tag of retiree health/medical expenses.)

No surprise, most of us are on track to fall short. Hewitt says about 80 percent of workers today have a retirement fund gap. But there are indeed some pretty straightforward (read: achieveable) steps you can take today to close your retirement fund gap.

Recognize Saving 10 percent a Year Won't Cut It
Even a conscientious 25-year-old who has the foresight to be saving for retirement needs to set aside more than 10 percent of salary. And if you happen to be a late-bloomer when it comes to retirement savings, it's going to take 15 percent or more. From Hewitt's study:

...a 25-year-old employee who makes $30,000 a year is expected to meet all of his/her retirement needs if he/she contributes, on average, 11 percent of his/her pay each year throughout their career (assuming he/she also receives an additional 5 percent employer contribution to his/her defined contribution account). If an employee waits until age 40 to join his/her defined contribution plan, he/she needs to save an average of 17 percent of pay per year.

Create Your Own 401(k) Auto-Escalation Program
Okay, 17 percent of salary is indeed an insanely high bar to contemplate. But rather than get paralyzed by that end target, focus instead on how you might be able to slowly ease your way into a higher savings rate. Raise your 401(k) contribution rate by just 1 percentage point every six months to a year and you'll likely find it pretty easy to make do with that slightly smaller paycheck.

While we're still waiting for Washington to make 401(k) auto-escalation a standard feature of retirement plans, you can do this on your own by contacting your plan or H.R. dept periodically and directing them to raise your 401(k) contribution rate. If you're motivated to ratchet up your contribution rate even faster, vow to devote 50 percent of a raise to your 401(k). So for example, if you get a 4 percent raise, boost your contribution rate by two percentage points.

There's no high falutin' theory behind this: just the common sense idea that adjusting to small incremental change is a hell of a lot easier than say, doubling your 401(k) contribution rate overnight. And those small changes can in fact score you a big pay off. According to Hewitt, if employees increase their 401(k) contributions by 1 percentage point a year for five years nearly 40 percent of workers will have ample retirement assets at age 65 (up from the current estimate of 18%) and another 32 percent will be within shouting distance of their goal, falling short by less than two years of pay. Which brings us to the final retirement gap fix:

Embrace 67 as the new 65
Okay, this is no doubt the umpteenth time you've been hit with the "delay retirement" solution. But Hewitt provides a bit of context that should prove motivational. Turns out the retirement fund gap can all but disappear if you delay retirement by just two years, to age 67. From Hewitt:

...employees who delay retirement to age 67 can significantly reduce their savings shortfall. For these workers, retirement needs drop from 15.7 times final pay to 14.4 times final pay. At the same time, their retirement resources increase from 13.3 times final pay to 14.2 times final pay, enabling them to meet 98 percent of their retirement needs.

And hey, if you can manage to delay taking your Social Security benefits until age 70 you'll be entitled to a payout that will be 24 percent higher than if you start at age 67. That should come in handy closing any remaining retirement gap.

Related Articles on MoneyWatch:
When to Take Social Security
The Payoff from Retiring Later

Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.