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Are most of us saving too little for retirement?

If maintaining your lifestyle is the goal once you retire, then you should be saving up to 15 times your current income, says Richard C. Marston, author of Investing for a Lifetime: Managing Wealth for the New Normal.

"In Investing for a Lifetime I frame the savings task in terms of a savings goal – enough wealth to live as comfortably in retirement as in our working years," the professor of finance at the Wharton School at the University of Philadelphia says.

Fidelity Investments in 2012 suggested eight times current income as the goal. But Dr. Marston thinks eight times is not nearly enough.

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In his book, Dr. Marston has nearly doubled the recommended amount, basing it on what he maintains is a more realistic retirement savings strategy.

The goal at retirement, he explains, is to have saved almost 15 times income. To do so, the individual must save more than 15 per cent of gross income for at least 30 years.

In his highly readable book, he breaks it down into a simple formula: If you are single and have made $100,000 a year before retirement then you should have $1.475-million saved by the time you retire; if you are married and have made $100,000 a year before retirement, you should have $1.15-million saved, or 11.5 times your annual salary.

"It's a simple calculation to show that the individual must save almost 15 times income by the time of retirement to maintain preretirement spending. Eight times income does not work," Dr. Marston says.

It's a tall order. Saving up to 15 times your current income is admittedly difficult – even Dr. Marston thinks so – because of many other competing things people want to do with their money.

To make it doable, Dr. Marston suggests starting young:

"Saving for retirement is tough for young and old alike, but it turns out that the savings goals look much less formidable at earlier ages," he says.

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For example, if an investor starts saving at age 26 rather than at age 36, the savings rate can be smaller: "A person 10 years from retirement need save only about 50 per cent of the final retirement goal. A person 15 years from retirement need save only 33 per cent of the final goal."

When calculating what you need in retirement, Dr. Marston says not to forget to take advantage of all the tools available – pension plans such as defined contribution programs, for instance, where much of the saving is automatically done for you.

In the United States where Dr. Marston bases most of his research, it's possible to save 15 per cent of income this way in pre-tax form, and the employer often matches a portion of that.

"The beauty of defined contribution plans is that they are invisible," Dr. Marston says.

"Once you sign up for them, most employees don't revisit the savings decision before they retire or switch jobs again. And, in the U.S. at least, the sign-up is automatic unless the employee elects to stay out of the program. It's true that small business owners have to deliberately decide to contribute. But they are more likely to save anyway."

For savings outside of DC plans, the key is to include savings in the budgeting process along with paying rent or the mortgage, paying utilities and other monthly expenses.

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"Otherwise," Dr. Marston adds, "it's just a residual after essentials and vacations."

But not everyone agrees that this is the best approach to retirement savings.

According to Barbara Stewart, a CFA charterholder and portfolio manager at Cumberland Private Wealth Management Inc., in Toronto, Dr. Marston's suggestions are hard to follow because investors are idiosyncratic; they have different needs as well as habits, making a one-size-fits-all approach to retirement planning untenable.

It's also, for some, an unattractive option.

"I am sure there are some parts of the population who would be well-advised to save more, even the majority of investors. But in my experience it is usually a bad idea to lump all investors into one category," says Ms. Stewart.

"The extent of the savings required ultimately depends on the unique situation of each individual and/or family."

Besides, not everyone has the goal of living on even 85 per cent of their current income in retirement. Some investors have other goals, such as causes they believe in, their own lives or the well-being of their families, says Ms. Stewart, author of the Rich Thinking series of global studies on female investing habits.

"Women invest in causes and concerns that matter to them. They aren't waiting until retirement to spend if they feel they are helping their personal cause of saving their family, saving the world or saving their soul," says Ms. Stewart.

"Dr. Marston's new return assumptions do imply that some people should save more.

"But people, on average, don't save enough even under the old return assumptions. We have been telling them the same message for a long time now. It seems unreasonable to think that people will change their behaviour because of some new projected returns."

On this point, Dr. Marston appears to be in agreement.

In his book, he openly acknowledges that saving is much harder than investing. Too many baby boomers are approaching retirement with insufficient funds, he says: "Savings goals just seem too formidable."

Intermediate goal-setting makes the task less arduous, he says.

"Investment returns compound over time, so intermediate goals are not as high as you think."

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