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Why We Don’t Save Might Surprise You

We're not saving enough for retirement because we don't know how.We’re not saving enough for retirement.

Studies repeatedly point this out. And, it so happens, most people realize they aren’t saving enough.

Conventional wisdom suggests that if we know we’re not saving enough, we’re not doing it because we can’t afford to save.

That might not be the reason.

Some 83% of people who participated in a new survey from State Street Global Advisors, an asset management firm based in Boston, said they had enough room in their budgets — at least 5% — to save more. Almost two-thirds said they could reduce their spending by 10% or more to build their 401(k) plans.

So why don’t they?

State Street calls it the “action gap.” People know they need to save more, but they don’t know where to begin.

From the survey:

  • Two-thirds of the respondants know they should rebalance their investments over time, but less than a third know how to do so.
  • Less than a third know how to make retirement savings last a lifetime, even though a vast majority think they should know.

The firm hopes the survey is a call-to-action of sorts for employers to begin a better dialogue with their employees about retirement savings.

“Employers want their employees to be financially successful, not necessarily financial experts,” Kristi Mitchem, State Street’s senior managing director and head of Global Defined Contribution, said in a press release. “We need to turn confusing tasks into clear steps, not with investment lingo, but with simple, clear descriptions and explanations.”

Here are a couple simple strategies we’ve come across for figuring out how much to save for retirement:

Save 11 times your final working salary. That’s the figure Aon Hewitt says you’ll need to get through retirement beginning at age 65. Don’t include your expected Social Security benefits. Those are assumed already in the calculation.

Follow the 4% rule. The 4% rule lets you figure how much income your savings can provide and use that to calculate your replacement income — the percentage of your current income you’ll be able to replace when you retire.

Your goal should be to replace at least 60%, and preferably 80%, of your preretirement income.

Just calculate what 4% of your total savings is. That’s what you can take out during your first year of retirement. Then take the same amount out each year thereafter, adjusted for inflation.

If you have $500,000 in savings, you can take out $20,000 that first year to cover living expenses.

Knowing what you can take out can help you decide today what you’ll need tomorrow.

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