In my recent series of articles about what to do if you think you are behind in saving for retirement, I reviewed some of the current thinking about retirement savings targets based on your pre-retirement income.

That raises an important question. If you decide that you want to try to have a certain amount by the time you retire, how do you determine how much you should be saving right now?

This question is just as important for someone in their 20s or 30s and just starting to save as it is for someone in their 40s or 50s who needs to play “catch-up.”

If you’re a numbers person (or as Dave Ramsey would say, the “nerd” in the family), you could use an online retirement calculator to come up with a number as a percentage of your current income. To do that you would have to do a lot of speculating about at what age you want to retire, how much income you will need in retirement, and (this is the most difficult of all), what rate of return you think you will earn on your savings.

Perhaps you see why I said you’ll “have to do a lot of speculating” – the reality is you may just be pulling numbers out of the air. (This whole retirement planning business does seem to be based on a lot of airborne numbers, doesn’t it?)

It may not surprise you that a lot of people do just guess, perhaps because they’re not “numbers” people, or maybe they just don’t want to spend all that much time thinking about it – it makes their heads hurt.

Regardless of the reason, as I mentioned in an earlier article, many people end up guessing too low and saving too little. Guess too high and you’ll always be frustrated.

My own approach, especially when I was younger, was to just default to whatever the matching percentage was in my company’s 401(k). If the matching percentage was 5% of my salary, and the company matched it 100%, then I saved 5%. Easy peasy, and I was effectively saving 10% of my salary, right?

As Coach Lee Corso would say, “not so fast.” (Pardon the college football reference, but as I write this it is that time of year.) That seemed to be enough, but it wasn’t based on any specific calculation about my future needs. It was based solely on optimizing my employer’s match.

But here’s the problem with that approach: Many plans have fairly low default rates and/or fractional matching percentages and may not ensure that you are actually saving enough for retirement.

What if they only match 5% of salary at 50 cents on the dollar?  If you save the 5%, then you’re effectively saving only 7 ½ %, not 10%.

If you are familiar with Dave Ramsey and Financial Peace University, you know that he recommends that you invest at least 15% of your pre-tax income for retirement in a 401(k) and/or post-tax in a Roth IRA. (Many companies now have Roth 401(k) plans as well.)

I’m not sure how Dave came up with 15%, but it seems to be a fairly common recommendation.

Although I didn’t know if there was anything scientific about the 15% rate, it seemed pretty reasonable. But then I asked myself, why is it reasonable? Why not 10% or perhaps 20%? Is a certain percentage for everyone at all income and current savings levels appropriate? Should people save different percentages based on their own individual situation?

If you are young and perhaps just out of college, you may not be able to save anything. But later on, perhaps when you’re in your late 30s or even 40s and more able, I think you’ll need to save more – perhaps much more – to make up for lost time. If you wait until you are in your 50s, well…I think you get the picture.

The average U.S. personal saving rate (as a percentage of income) over the last few years has hovered around 5%. Something is always better than nothing, but one thing is for sure – 5 to 10% or less just won’t cut it for many folks unless they started very early.

I have read that some financial planners say that everyone should save as much as they possibly can. I’m not sure that’s the right answer either. When does wise saving and investing become hoarding based on fear and/or greed? Yes, we need to save, but we should also position ourselves to be able to generously give as well. And hey, we have to live too!

If we have realistic savings targets when we are young and live within our means, we will be better positioned to give more generously when we are older and presumably have a higher income. Each person has to find the right balance between spending, saving, and giving, while acknowledging that in the end it all belongs to God anyway.

But let’s come back to the 15% guideline. That’s a chunk of change no matter what your income!

As I was still curious about the 15% number, I decided to do a little more research on the subject to find out why the conventional wisdom is that you should be saving between 10% and 20% of your pre-tax income. I came across a reference to a study on Investopedia that was done by the Boston College Center for Retirement Research (CRR), How Much Should People Save? The study is pretty academic stuff, but it provides some suggested savings percentages that have support in a strong mathematics/statistics foundation.

Well, it turns out that their most basic recommendation is that saving 15% in a 401(k) is a pretty good one if you earn at least an average salary, start saving no later than your mid 30s, and plan to meet a 70% replacement rate when you retire at age 65. Their calculation assumes an employer match, so if your company matches 5% you’ll need to contribute 10%. If they match up to 5% of your salary but only at 50 cents on the dollar, you’ll need to save more.

Not surprisingly, Investopedia stated that the CRR also found that when you start is the most important factor:

The biggest factor in the calculations was age – when you started saving and when you ended. Start saving at 25 and you only need to earmark 10% of your annual salary to retire at 65; if you wait to retire until 70, you’d have to save only 4% annually.

The numbers are much worse for those who start late. If you waited until age 45 to start saving, you would need to put aside an unrealistic 27% of your salary for retirement. This would pretty much force you to work until age 70 so you could save a more realistic 10% annually.

The study also included a useful table that shows target saving rates that vary by the age you start saving and the age you think you’ll retire.

The CRR prepared its calculations by assuming a range of salaries across different age ranges. For example, for ages 39 to 41, low income is considered to be less than $42,000, high income is greater than $81,000, and medium income is between these amounts.

You can see how saving early helps. For example…

If you start saving at age 25 and you …

• Retire at age 62: Save 15 percent of pay
• Retire at age 65: Save 10 percent of pay
• Retire at age 67: Save 7 percent of pay
• Retire at age 70: Save 4 percent of pay

If you start saving at age 35 and you …

• Retire at age 62: Save 24 percent of pay
• Retire at age 65: Save 15 percent of pay
• Retire at age 67: Save 12 percent of pay
• Retire at age 70: Save 6 percent of pay

If you start saving at age 45 and you …

• Retire at age 62: Save 44 percent of pay
• Retire at age 65: Save 27 percent of pay
• Retire at age 67: Save 20 percent of pay
• Retire at age 70: Save 10 percent of pay

So, it appears that a 15% savings rate has pretty solid support, even in academia. But there is another lesson here, and it’s the same old one: start saving as soon as you can. The amounts you will have to save will only get higher the longer you wait.

If you’re young you may be thinking, yea, yea….I’ve heard that a thousand times. Well, listen up again – I may have some good news for you.

As the chart shows, if you’re younger, say in your mid-20s, you might be able to get by with saving less, say 10%. I didn’t start saving in a 401(k) until I was into my 30s, which meant that saving 5% with a 100% match (effectively 10%) was a little low for me at that time. So, I had to ramp it up a bit as I got older.

If you are older, say already in your 50s, it gets a little tricky if you try to use general guidelines like those developed by the CRR. That’s because they make certain assumptions which include that you haven’t saved anything yet. That’s also why the percentages are so high. However, you may have observed that the percentages decrease as the projected retirement age increases. (Someone who starts saving somewhat late, at age 45, only needs to save 10% if they wait until age 70 to retire. That’s partially attributable to an increased Social Security payout.)

Most people who are in their 40s or 50s have saved something, and if that’s the case, you’d be better off using an online retirement calculator that can take your situation into account, or work with a retirement planner who can help prepare these calculations for you.

While using an online retirement calculator may be a more reliable way to determine how much to save for retirement, you’ll still need to make a number of assumptions that may or may not prove to be accurate. So, if you’re in your 20s, 30s or 40s, it may be sufficient to use the CRR guidelines; they might get you in the ballpark of saving enough to retire with dignity. Just be prepared to complete more accurate calculations when you reach your 50s and possibly have to make some mid-course adjustments.

If you’re in your 50s, and have some savings, you definitely should use a calculator. Depending on how much you have saved, you may need to save more than 15%, so get prepared for that. If 15% is all you need to do right now, then keep doing it. If you need to be saving more, see if you can find ways to increase it in the years ahead. Every small percentage increase will help- remember this:

Wealth gained hastily will dwindle, but whoever gathers little by little will increase it. Proverbs 13:11 (ESV)