The main goal before you retire is to make sure that you have enough money when you do retire so you can maintain your standa...Read more
Study Suggests Some Are Saving Too Much for Retirement
- May 1st, 2013
A retirement planning rule of thumb is that people should aim to replace 80 percent of their preretirement gross income when they retire. But a new analysis calls this “clearly misguided,” and suggests what it claims is a more realistic alternative.
In his study, “Do Financial Planners Advise Us to Save Too Much for Retirement?” Austin Nichols, a senior research associate at the Urban Institute, says the problem with the “80 percent” rule is that in order to achieve it, many save a high percentage of their income – sometimes 50 percent or more if they start saving late -- for decades before they retire. Then, when they do retire and are ready to enjoy the 80 percent of preretirement income they’ve been saving for all that time, their spending must go way up, often doubling. This level of spending may not be necessary, Nichols suggests.
Nichols says an alternative planning strategy is to aim to save so that spending is roughly equal both before and after retirement. To achieve this alternative goal, he estimates that a single individual earning a medium-level income who starts saving for retirement at age 45 would have to save only 28 percent of his or her income. If the saver were trying to achieve the goal of being able to spend 80 percent of preretirement income, he or she would have to set aside 46 percent of income over the years.
Although Nichols acknowledges that the recession has eaten into many retirement nest eggs and that cuts in Social Security benefits are almost certain, he says “it would be a mistake for current workers to overreact and save so much that their consumption actually rises the day they retire.”
But the message of Nichols’ analysis is undoubtedly aimed at those who have the means to put money aside for retirement. Another recently reported analysis finds that more than 9 million retired Americans lack the money to cover basic living expenses.
Last Modified: 05/01/2013