Saving for Retirement

I would bet that very few individuals, even the most savy, know how much they "should" save to reach their retirment goals, or know what their expected retirement income is. The recent edition of The Economist provides a great rule of thumb we should relay to our students.

That approach will be hopelessly inadequate for those who want to build a decent pension, especially in defined-contribution, or money-purchase, schemes, where the employee bears all the investment risk. The average American scheme member contributes just 7.8% of salary to his pension scheme. His employer, on average, contributes only 4.4%. He has a pot worth only $68,000. A rule of thumb is that total contributions need to be around 20% of wages to match a traditional final-salary scheme.

The Economist, 12/6/08, page 13