According to fourth quarter 2012 data for defined contribution plans administered by MassMutual (as reported in media site BenefitsPro.com), the average deferral rate for women participants was 5.38% and the rate for men 5.81%. This was reportedly the highest savings rate in four years. That’s the good news. But is a 5% or 6% savings rate sufficient to accumulate enough money to carry us through thirty years of post-retirement bliss? While the answer is uniquely dependent on the specific future goals, expenses, and saving/spending patterns of each individual or family, it is possible to calculate an “average” savings rate that can provide some indication of how much each of us should be saving while we’re working if we plan to do anything in retirement beyond fishing and eating Spam.

I put together a simple spreadsheet to do just that, and the results are not encouraging. First, the assumptions:

• You graduate college at age 22, and work for 42 years.
• Your salary keeps up with inflation.
• You get a 5% bonus (or change to a 5% more lucrative job) every five years.
• The growth rate of your savings is 7% annually (both before and after retirement).
• You retire at age 65 and live until age 95.
• Your post-retirement expenses are similar to your pre-retirement expenses.
• Social Security covers 20% of your retirement expenses.

Assuming the above, it turns out that you need to save about 18% of your salary during each of your working years in order to maintain your standard of living throughout your post-retirement years.

Of course, these assumptions will not apply to everyone’s situation. For one thing, our savings are not consistent from year to year. We buy houses, we have children, and we discover new hobbies and interests as we journey through our lives. We may even end up in significantly higher-paying jobs and possibly save more than 18% in our later working years. Or alternatively become used to a higher standard of living, requiring an even larger nest egg at retirement. Then there’s Social Security, slated to go bankrupt in the near future unless our political leaders are able to compromise on a fix. What do you think the most likely outcome of that debate will be? Investment growth rates are another factor that will have a significant effect on our total savings. How realistic is 7% on average each year? Given current world economic conditions, coupled with the potential for a long period of rising interest rates, many advisors (me included) see 7% as a fairly aggressive long-term target growth rate. (As an aside, I ran the numbers with a 6% growth rate instead, and that resulted in a requisite 24% annual savings rate!).

The point here is that saving 6% a year for retirement is nowhere near enough. Even if you max out your 401(k), you may not be accumulating a sufficient level of savings to last throughout a long period of retirement. If you haven’t already done so, you should plan what you would like to do in retirement and how much it will cost, then make sure to allocate a sufficient amount of your family’s budget to cover your anticipated future needs.