Recently, the news has been reporting on the sad, but completely unsurprising finding that people are raiding their retirement accounts to pay credit card debts and other bills. Of course, taking any amount of money out of your retirement account for any reason jeopardizes your retirement security.

Personal retirement saving is still a relatively new concept for this country and something we are all still learning about. In the past, pensions put the burden of saving on employers, now Social Security puts the burden of saving on the government. But for those of us with decades to retirement, the reality is that the government retirement system will start to fall apart just as we are entering retirement, leaving the burden of saving for retirement on us. Already, we are starting to see proposals to increase the retirement age for Social Security and Medicare to 70.

How much do you need to save for retirement? It depends and the recommendation changes person to person. Recently an NBC news report gave this generic guideline:

By age 35 – 1x salary
By age 45 – 3x salary
By age 67 – 8x salary

I like this guideline because it attempts to give at least some concrete numerical guidelines so that you know whether your savings goals are on track.

However, this guideline is a little bit too simplistic in a few ways. Is the salary guideline based on your highest, pre-retirement salary or your salary as it happens to be at those particular ages? Also, these guidelines, the same as all retirement saving guidelines, make the mistake of assuming that all of us will just continue to hold steady or earn more and more money until we retire. Based on recent economic challenges, we all know that it is probably more likely that our incomes will fluctuate up and down and there might even be period s of unemployment or under-employment as well.

Just testing out this guideline, what does it actually mean?

For all of my cases, I made the following assumptions:

• The savings cases are for a couple so the retirement savings amount has to cover the cost of living expenses for two people and the contributions count both of their savings.
• Constant employment and retirement savings contributions
• 2% annual inflation
• 4% annual rate of return on investments (probably low but a conservative guess)
• Once you reach retirement age, you set aside an amount from your savings to cover out-of-pocket medical expenses, estimated to be $240,000 for a couple (in 30 years from now the inflation-adjusted cost would be about $433,000) and you live on the rest.

I used this inflation calculator and this retirement calculator.

So what are some scenarios illustrating how this would work?

As you can see, in terms of the monthly contributions required to hit these targets (the numbers that people probably care about the most), you have to put the bulk of the money in by age 45! You have to make significant contributions right out of college and the largest share between ages 35 and 45. 35-45 is a tough time for a lot of people to be putting this kind of money away as many people are buying homes and raising families during those years. This model then slacks off once you hit 45 so you don’t have to be putting in as much and if you have to retire early for some reason, you are still probably covered.

It’s a sound model but a significant change from the way most people save for retirement now. When I first ran the numbers, I confused the guideline and thought it was 1x salary by 35, then 2x salary by 45 then 8x salary by 67. With these guidelines, you still have to put in a good amount by 35 but then you slack off a little until 45 at which time you ramp up and make the bulk of your contributions. While this model does not account for the risks of early retirement as well as the original, it probably better represents how most people actually save for retirement.

Whenever I run any kind of long-term retirement planning numbers, it does feel a bit depressing. The savings numbers are huge and the payoffs so low. It’s also kind of sad to think of the end of your working years or even the end of your life! But, once I face all this sadness, I get over it and forge ahead with my plan. With a plan in place, I can then relax and start to enjoy my current life more.

I also think that retirement saving tends to work best for people who don’t perceive money as the key to happiness. The more money (or a particular lifestyle or image) equates to happiness in your life, the harder it will be for you to trade off “losing” money today to your retirement savings. So a very real part of being a good saver is being able to build a foundation for your life that is rich in non-material gifts. You know, the REALLY good stuff like love, friendship, the passion to learn, optimism and the ability to appreciate the small things.

What is your reaction to this retirement savings guideline? Are you on track? If you are in retirement already, how would you have fared under these proposed changes? Please share in the comments.