Window of Savings Opportunity Starts Closing at 35, Study Says

A new study suggests that unless an individual begins saving before age 35, they are in serious danger of facing a significant drop in lifestyle when they retire.

A recent study by several Ibbotson Associates researchers, titled the National Savings Rate Guidelines Study, found a “critical inflection point’ between ages 35 and 40. “Individuals who start saving for retirement after age 35 face the challenge of an increasingly higher savings rate needed to accumulate sufficient capital,’ researchers found. For example, the recommended savings rate for a person starting to save at age 25 typically more than doubles if he or she waits until age 45 to start saving and triples at age 55.

Further, in addition to age being a concern, workers whose income increases faster than inflation will have to save an increasing amount to “catch up” to be able to provide for the higher assumed standard of living in retirement.

The study provides a rough guideline of how much investors need to save to reach their retirement goals by calculating the savings guidelines and capital needs as a percent of net pre-retirement income—pre-retirement income minus annual retirement savings. The researchers assumed retirement cash flow would come from both Social Security and distributions from personal capital, and calculates retirement cash flow using an 80% replacement ratio of pre-tax pre-retirement net income for a single person, along with other assumptions, including:

  • People invest their savings to match the asset allocation of a typical age-appropriate target maturity fund.
  • Investment fees are not taken into account when calculating performance.
  • Ending wealth value needed for retirement is the monetary sum it would take to buy an inflation-indexed lifetime fixed-payout annuity that would cover the difference between Social Security payments and 80% of net pre-retirement income.
  • Social Security benefits are based on calculations that the Social Security Administration posts on its Web site but assumes full Social Security benefits are available at age 65 instead of age 67 to match the commonly accepted retirement age.
  • The savings rate guideline is for an individual, not a couple.
  • Investors’ income is assumed to increase with inflation.

Therefore, using Monte Carlo simulations (employing parameters of current age, retirement age, current income level, income growth rate, current portfolio amount and income replacement ratio, and portfolio asset allocation), the researchers determined that someone making $40,000 would:

  • At a starting age of 25, have to save at a 10% rate to generate 80% income replacement for retirement and 4.6% if they wanted 60% income replacement;
  • At a starting age of 35, have to save at a 16.4% rate to generate 80% income replacement for retirement and 7.4% if they wanted 60% income replacement;
  • At a starting age of 45, have to save at a 29.4% rate to generate 80% income replacement for retirement and 13.4% if they wanted 60% income replacement;
  • At a starting age of 55, have to save at a 66.6% rate to generate 80% income replacement for retirement and 30.2% if they wanted 60% income replacement.

However, this is a general guideline, according to the report: “this savings guideline will be more accurate for younger investors, because they tend to have less wealth and simpler financial situations,’ the researchers said. “Older investors, in particular the ones with more complex financial picture, should consult with a financial adviser to determine an exact savings rate.’

Researchers Roger Ibbotson, James Xiong, Robert P. Kreitler, Charles F. Kreitler, and Peng Chen also determined that Social Security benefits have a greater impact on low-and moderate-income individuals than they do on high-income individuals because benefits are capped at certain income levels, meaning that higher-income individuals have to save more to offset the lower proportional benefits.

For a full copy of the study, published in the Journal of Financial Planning, visit