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

The nonprofit Employee Benefits Retirement Institute has come up with some new figures based on its Retirement Security Projection Model, which, it says, goes further than merely rely on replacing a percentage of income to pinpoint savings goals. 

RSPM modeling accounts for longevity, postretirement investment risk, and nursing home costs, items and factors most other equations don’t consider, according to Jack VanDerhei, EBRI’s research director. 

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

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

A 25-year-old single male earning $40,000 a year who contributes 3 percent of his salary over his career would have a “50-50” chance of income adequacy, according to EBRI’s calculations.

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

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

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

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

“In essence, this allows one to pick which of three contribution rates they are most likely to choose for the future and then see how large their existing account balance would need to be at that age,” explained VanDerhei. 

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

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

Obviously, the closer to retirement, the more existing savings are needed to reach the highest probability of retiring successfully. 

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 to reach the highest probability of retiring successfully. 

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