Retirement Savings: 11 Times Final Pay is the New Target

How much do you need to retire? It's the cosmic question of our day and a new report from Aon Hewitt puts forth a simple answer. But this won't be the last word on the subject.

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Philosophers have long puzzled over why we exist and whether we are alone in the universe. But the cosmic question of our day is decidedly more practical: How much money do I need to quit work for good?

When financial safety nets like Social Security, private pensions, and virtually guaranteed employment were strong you didn’t often hear that question. You worked until you were rich or couldn’t work any longer, and things generally were fine. But not anymore. We’re on our own, and the how-much-is-enough refrain has reached an almost mystical state worthy of the Dalai Lama.

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Author Lee Eisenberg tried to divine The Number needed to retire in his best seller. For many years, planners mindlessly set the target at $1 million, figuring that would be plenty. Rules of thumb like saving 15% of income for 40 years or accumulating an amount capable of generating 75% to 85% of your final working salary have been popular guideposts for a while.

The problem with retirement planning is that so much is unknowable. How long will you live? What will your investments return? What will the inflation rate be? The web has a bunch of good calculators to help you sort this out. Some of the best are featured in this blog post.

But a new analysis from the benefits consultant Aon Hewitt tries to keep things simple: 11 times your final working salary. That’s how much an average worker needs beyond Social Security payments to retire at 65, according to the report. The estimate takes into account inflation and future medical costs. It is based on the retiree maintaining the same standard of living.

Working longer makes a difference. At age 67, you would need 9.4 times final pay. Retiring early, of course, requires more savings—13.5 times final pay at age 62. The analysis, which looked at 2.2 million employees at 78 large U.S. companies, found that most employees with a likely 30-year career and who are saving in an employer-sponsored plan will fall short of accumulating 11 times final pay. The typical employee is on track to amass 8.8 times final pay.

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Is 11 times final pay the final word on how much you’ll need to retire? Hardly. Others have put the figure far higher or far lower, and with the future being inherently unknowable this discussion will provide grist for financial philosophers for years to come.

Where does that leave you? Save aggressively. Live frugally. Use conservative estimates for expected investment returns and liberal estimates for how long you will live. Allow for inflation and plan on rising medical costs—and find a source of guaranteed lifetime income to cover your base expenses. That’s a philosophy you can take to the bank.

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