Successful retirees are saving 10 times their annual income, study shows

by Jim Sloan

A new study has developed an easy-to-use "retirement planning score" that gives you a simple way to track your progress toward having enough money in your retirement savings accounts to adequately finance your golden years.

The study from Lincoln Financial Group uses an assets-to-income ratio that helps you monitor your retirement savings progress throughout your professional life. This measure of your savings rates shows whether you are ahead of schedule for retirement or, more importantly, behind in your retirement investments and need to pick up the pace a little bit.

The study suggests you should save at least 10 times your annual income at retirement. The analysis is based on information gleaned from nearly 1,200 retirees, including those who became so-called "10-timers" and those who failed to achieve the best savings rates.

The 10-time retirements savings account score, which Lincoln calls its retirement power score, gives people a simple method for tracking their readiness for retirement. Researchers admitted the score is an "evolving target" that changes as your income changes through your professional life.

Lincoln, noting that only 11 percent of retirees succeed in become 10-timers, said the strategy is a simply way to encourage and "empower" people to save more for retirement.

Here's how it works

According to the Los Angeles Times, the strategy involve adding up everything in your various savings accounts, including your checking account, money market account, certificate of deposit, online savings account and retirement savings accounts--including 401(k)s.

Then you subtract all non-mortgage debt. Real estate investments are excluded from the Lincoln equation. Then you divide your net savings by your gross annual income to arrive at your score.

For instance, say your gross annual salary is $50,000 and you have $180,000 in a retirement savings account, $30,000 in a state pension fund and $70,000 in different individual retirement accounts. This gives you a total retirement savings amount of $280,000. You divide that amount by your annual salary and get a ratio of 5.6. Under the Lincoln formula, you would be advised to step up your retirement savings.

Other habits of 10-timers

But the Lincoln study found that successful retirees do more than save 10 times their annual salary. Among their other strategies, they:

  • Contributed to workplace retirement plans
  • Followed defined investment strategies, including relying on index funds
  • Practiced "power saving" between the ages of 30 and 40
  • Got advice from a financial professional

Just as importantly, Lincoln said there were three behaviors that the 10-timers did not rely on, including:

  • Relying on an inheritance to fund their retirement
  • Selling a primary home or making money through real estate
  • Selling a business or company stock from a former employer

Lincoln noted that many of us rely on just these types of revenue sources or investments when we plan our retirements. And though some of these practices may, in fact, help us fund our retirements, they aren't being utilized by the 10-timers who were part of the study.

Instead Lincoln advises us to not only save regularly but to increase our savings rates whenever our income or circumstances allow.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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