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Deciding How Much to Save

See the Tabs Below for Details on the Following Steps:

Step 1 - Set Your Financial Goals
Step 2 - Estimate Your Retirement Income
Step 3 - Design a Plan To Save What You'll Need
Step 4 - Start Saving as Early as You Can
Step 5 - Review Your Progress


  • Step 1
  • Step 2
  • Step 3
  • Step 4
  • Step 5
  • More Information

Setting goals is an important part of any financial plan. Since there are so many expenses competing for your income, it is important to identify your short term, medium term, and long term goals.

  • What financial goals do you want to reach within 1 to 4 years?
  • What goals do you want to accomplish within 5 to 10 years?
  • What goals do you want to accomplish beyond 10 years?

During most of your lifetime, you'll probably be working toward several goals at once, although financial planners often suggest that you have at least one month's take-home pay set aside for emergencies before you focus on other goals.

Many people find it helpful to set up a separate account for each goal. Short term emergency savings should be kept in an account that is fairly easy to get to, such as a money market account or a savings account. For medium term savings such as money you plan to spend for purchasing a home or paying for your children's college, a personal mutual fund account or a prepaid college tuition plan may be appropriate. Retirement savings are ideally suited to the Deferred Compensation Program.



Term Savings

When you begin setting financial goals for retirement, you'll need need to ask yourself a few questions.

  • At what age do you plan to retire?
  • How much regular income will you need after you retire? (Most retirement planners suggest you'll need 75 - 85% of your pre-retirement salary to maintain your standard of living.)
  • Will you need extra savings for special things you want to be able to do in retirement?
  • How much income will you have from other sources?

Once you've set your retirement goals, you'll need to gather information about your future retirement income.

1. How much annual income will you receive from Social Security?

Social Security benefits could replace 25 to 50% of your final average salary if you'll have 35 years of covered employment and if you wait until age 65 to 67 to begin drawing benefits. If you begin drawing benefits at age 62, however, Social Security won't replace more than 15 to 35% of your final salary.

If you plan to retire before the age at which you will become eligible for unreduced benefits, your benefit will be reduced by 5/9% for each month you lack attaining eligibility for unreduced benefits. For example, if you were born in 1943 and plan to retire and begin drawing social security benefits 12 months "early" at age 65, your benefit will be reduced by 6.67%.

For an estimate of your Social Security benefits, use the Social Security calculator, refer to your annual TCRS statement, refer to the following chart, or complete an estimate request form and send it to the Social Security Administration. For a request form, call 1-800-772-1213. Keep in mind that Social Security benefits are subject to decrease in the future.


Social Security Benefits
Estimated Benefits

Last Five Year
Average Salary

Unreduced
Benefits

$15,000 $7,968
$20,000 $9,552
$25,000 $11,124
$30,000 $12,708
$35,000 $14,064
$40,000 $14,616
$45,000 $15,096
$50,000 $15,528
$55,000 $15,936
$60,000 $16,296
$65,000 $16,476
Eligibility Age
Year of Birth Reduced Benefits Unreduced Benefits
1937 or earlier 62 65
1938 62 65, 2 months
1939 62 65, 4 months
1940 62 65, 6 months
1941 62 65, 8 months
1942 62 65, 10 months
1943-1954 62 66
1955 62 66, 2 months
1956 62 66, 4 months
1957 62 66, 6 months
1958 62 66, 8 months
1959 62 66, 10 months
1960 or later 62 67

*Social Security benefits have been calculated by Bryan, Pendleton, Swats & McAllister, actuarial consultants for the TCRS, assuming retirement took place in 1999, the retiree worked a full career of 35 years or more, and salary increases throughout the retiree's career followed the same pattern as National Average Earnings.


2. How much income will you receive from TCRS?

Regular TCRS benefits will replace approximately 20% of your final average salary at age 60 if you'll have 12 years of TCRS service; 30% of salary if you'll have 19 years of service; 40% if you'll have 26 years of service; or 50% if you'll have 32 years of service.

For an estimate of your TCRS benefits, use the TCRS calculator, find your service and salary on the TCRS Group I Benefit Chart or refer to your annual TCRS statement. That statement includes estimates of the income you would receive at various retirement ages.

3. How much income (if any) will you have from other sources?

Consider other pension benefits you might have accrued during your career and other savings.

4. Total your sources of retirement income and compare that total to your current salary.

Since your Social Security estimate and your TCRS benefit estimate are expressed in today's dollars, you can get a good idea of how close you are to meeting your retirement income needs by comparing your estimated benefits from those two sources to your current salary.

 
 

If your estimated annual retirement income doesn't total 75 to 85% of your current salary, you'll want to build up savings to make up the difference. For example, if TCRS benefits will replace 40% of your salary and you expect social security benefits to replace 25% of your salary, you should try to save enough to replace about 10 to 15% of your salary unless you have additional sources of retirement income. The following charts show approximately how much of your salary you would need to save every year to enable you to replace 15% or 25% of your final salary. If you plan to retire before age 62, you may also want to build in some extra savings for the years between retirement and age 62 since you won't be receiving Social Security benefits during that period.

If you'll have 30 years or more of TCRS credit and if you'll be eligible for unreduced Social Security benefits, you may not need much personal savings.

Percent of Salary to Save Every Year
To Replace 15% of Your Final Salary Beginning at Age 60
Amount You Have Already Saved for Retirement
Your Current Age
Little or Nothing
3 Mo. Salary
6 Mo. Salary
9 Mo. Salary
12 Mo. Salary
55
30-36%
25-31%
20-26%
15-21%
10-16%
50
15-18%
13-16%
10-13%
8-11%
5-8%
45
10-12%
8-10%
7-9%
5-7%
3-5%
40
8-9%
6-8%
5-7%
4-5%
3-4%
35
6-7%
5-6%
4-5%
3-4%
2-3%
30
5-6%
4-5%
3-4%
3-4%
2-3%
25
4-5%
4-5%
3-4%
2-3%
1-2%

If you'll have less than 30 years of TCRS credit when you retire or if you plan to retire before you're eligible for Social Security benefits, you'll probably need to save more.

Percent of Salary to Save Every Year
To Replace 25% of Your Final Salary Beginning at Age 60
Amount You Have Already Saved for Retirement
Your Current Age
Little or Nothing
6 Mo. Salary
12 Mo. Salary
18 Mo. Salary
24 Mo. Salary
55
50-60%
40-50%
30-40%
20-30%
10-20%
50
25-30%
20-25%
15-20%
10-15%
5-10%
45
17-20%
13-17%
10-13%
7-10%
3-7%
40
13-15%
10-13%
8-10%
5-8%
3-5%
35
10-12%
8-10%
6-8%
4-6%
2-4%
30
8-10%
7-8%
5-7%
3-5%
2-3%
25
7-9%
6-7%
4-6%
3-4%
1-2%

These examples are based on the average cost of a single life annuity, without or with an annual 3% simple cost of living adjustment. They assume that your net earnings will keep pace with your future salary increases.

The earlier you start saving, the easier it will be to reach your goal. If you can't defer as much as you'd like to start with, start small and increase your deferrals each time you receive a salary increase. “Pay yourself first” by having your retirement savings automatically deducted from your paycheck each month.


Saving a Regular Amount Each Month
Monthly Deposits
Growth Over 10 Years
Growth Over 20 Years
Growth Over 30 Years
$ 20
$ 3,658
$11,780
$29,807
40
7,317
23,560
59,614
50
9,147
29,451
74,517
100
18,294
58,902
149,035
150
27,441
88,353
223,552
200
36,589
117,804
298,071
300
54,883
176,706
447,107
400
73,178
235,808
596,143
500
91,473
294,510
745,179

Approximate accumulations from regular deposits earning an effective annual yield of 8%. This rate is used for illustrative purposes only.


By starting early, you can take full advantage of the effects of compounding interest. The “rule of 72” is the easiest way to see how compounding interest can work for you. Dividing 72 by the interest rate being earned tells you the number of years it will take for your capital to double. For example, if you are earning 8% interest, dividing 72 by 8 tells you that it will take 9 years for your capital to double. Thanks to compounding interest, every $100 you save at age 24 could grow to $1,600 by age 60 if you earn an average of 8% per year on your savings!

If you were able to set aside $5,000 at age 25 and earn an average of 8% per year, it would double every 9 years, reaching $40,000 after 27 years (age 52) or $80,000 after 36 years (age 61). Of course, setting aside $5,000 all at once is difficult, but if you can set aside $68 each month and earn 8%, you could accumulate $5,000 in just 5 years.

It's a good idea to review your financial goals every few years to be sure that they are still in tune with your needs and that you are taking the effects of inflation into consideration.

You will receive an Annual Projection Statement from the Deferred Compensation Program which will show you how much you could accumulate by various retirement ages if you continue to save at your current rate. It will also show how much monthly income your projected account balance could buy. The Projection Statement expresses these values both in today's dollars and in future dollars.

If you are a member of the Tennessee Consolidated Retirement System, you will also receive an annual statement from TCRS which will show you approximately how much income you can expect to receive from TCRS and Social Security at various retirement ages assuming you continue to work through then. These amounts are expressed in today's dollars.

Keep both statements together and review them periodically to see how you are progressing toward your retirement income goals. If your savings earn more or less than you anticipated, you make want to make adjustments in the amount you are saving.

For enrollment information or forms, call Great-West at
(800) 922-7772


Copyright © 1995
State of Tennessee Treasury Department

This material is intended to provide general information only and does not supersede nor restrict procedures or authority established pursuant to state or federal statute. If there are any differences between this material and the law, the law will prevail.

The Treasury Department operates all programs and activities free from discrimination on the basis of sex, race, or any other classification protected by federal or Tennessee state law. Individuals with disabilities who may require an alternative communication format for this or other Deferred Compensation publications, please contact the Treasury Department's Deferred Compensation Director at 615-741-7063. Any eligible state employee who believes he or she has been discriminated against in the program should write to the Treasury Department's ADA Coordinator, 1st Floor State Capitol Bldg., Nashville, TN 37243.