A recent article by Joe Tomlinson at Advisor Perspective discusses some solutions to a broken retirement system here in the US. Some of the ideas being tossed around include:
- Creating a government mandated retirement account with guaranteed 3% return on investment.
- Required Defined Contributions (401k).
- Auto enrollment into 401k, 403bs, etc. when available OR an IRA when no retirement plan is available.
| Â 401(k) example–Required contribution rates | |||
| Asset Allocation | Average Return | Median Contribution | 90% Confidence Contribution |
| 0% Stocks, 100% Bonds |
3.20% |
17.0% |
21.8% |
| 25% Stocks, 75% Bonds |
4.58% |
13.3% |
18.2% |
| 50% Stocks, 50% Bonds |
5.95% |
10.2% |
16.5% |
| 75% Stocks, 25% Bonds |
7.33% |
7.6% |
15.8% |
| 100% Stocks, 0% Bonds |
8.70% |
6.0% |
15.2% |
In other words, if you save for 35 years, and cannot stomach any risk, and need to have a 100% bond portfolio, you’d need to save 21.8% of your salary to be 90% confident that you could retire. On the other extreme, if you were a risk taker and had ALL stocks, you’d need to save 15% to have the same confidence. This coincides with an earlier blog I wrote, How Much Should You Be Saving?
The most interesting part is that PEOPLE aren’t saving that much. Well, most people I work with do, but that’s because they come to me looking for advice on their savings. But according to the Federal Reserve, the average savings rate is 3.7%. See below.
So when someone is talking about how to fix the retirement system, the solution might be  to first educate savers on how much they should be saving.
Note: While these are general savings rates, and do not consider other sources of retirement income such as social security, pensions, etc. they are pretty good guidelines.
Personal Savings Rate
