You Should Be Saving at Least 12% of Your Pay for Retirement. Here's Why

To reach retirement in solid financial shape, you likely need to up your savings game today.

Vanguard reports that the median 401(k) contribution of American workers is 6% of pay. After adding in the median company matching contribution, the total workers are setting aside falls just short of 10%.

That may not be enough. Vanguard recommends a total contribution rate of between 12% to 15% of salary.

But you may want to save even more, depending on your situation and on how you expect stocks to perform in the future.

The Center for Retirement Research at Boston College looked at the “what to save” question a few years ago. Their analysis was based on the goal of saving enough to replace 80% of your pre-retirement income once you’ve stopped working — a common benchmark used by financial advisors.

Researchers’ recommendations varied based on annual income, the age when someone started saving, and the expected rate of return (after inflation) for a retirement portfolio.

If You Got a Late Start, Make up for Lost Time

A 25-year-old in 2010 who had “medium” earnings of $43,000 would need to save 12% a year to retire at 67 in solid shape, assuming a 4% after-inflation rate of return. If you waited until age 35 to start saving, you would need to save 18% a year. Retiring before 67 would require more savings, while working until age 70 would reduce the savings rate needed.

The more you earn, the more you likely need to save to maintain your standard of living in retirement. This is because Social Security will replace a smaller portion of your income than it does for lower earners. The CRR study found that a “maximum” earner in 2010 ($106,800) would need to start saving 16% of salary starting at age 25, or 25% of salary at age 35 to be in solid shape at age 67, assuming the same 4% inflation-adjusted annualized rate of return.