It's hard to plan for retirement, and one of the trickiest questions is: How much should I save?
The honest answer is: It depends. "The best-laid plans can be undone by a messy divorce, a disabling disease, or a stock market crash," Jonathan Skinner, a professor of economics at Dartmouth College, wrote in a study on the topic. Your future health-care expenses are almost impossible to predict, for example, especially as Congress considers big changes to the system.
But "it depends" is no help to millions of American workers, who aren't experts in finance and just want to know what to do. Uncertainty can be paralyzing, leading people to believe retirement is impossible and discouraging them from even starting to save. Many are getting the wrong impression from their employers' 401(k) plans, which often default workers into saving far too little.
We contacted more than a dozen retirement experts, across industry and academia, asking for a simple rule of thumb. How much, we asked, should people be saving in a 401(k) retirement plan, as a percentage of their income?
The experts disagreed.
So instead of one rule, here are seven, each with pros and cons we outline to help you save for retirement as thoughtfully and effectively as possible.
Listen to your employer.
Pro: It's easy, especially if your employer is one of the many now automatically signing workers up for a retirement plan.
Con: Automatic 401(k)s typically start out by setting aside just 3 percent of employees' income. That's way too little. Why don't companies push workers to save more? Because many match employee 401(k) contributions, and it can cost them more if workers save more. Plus, many employers assume workers will be annoyed by higher default savings rates.
Neither is a good excuse. Formulas for matching contributions can be be adjusted, and employees are about as willing to accept a 6 percent default savings rate as a 3 percent rate, a recent Morningstar study of plan data finds. Very few employers have a rate higher than 6 percent, so it's hard to know what the upper limit is. Another Morningstar survey suggests workers could accept saving rates as high as 12 percent.
"People tend to accept the default," said David Blanchett, Morningstar's head of retirement research. "We need to recommend folks save more."