A conventional rule of thumb says you may need to save 80% of your income to live comfortably in retirement. For most, this is a good place to start. For some, it may be too much.
According to Estimating the True Cost of Retirement, by David Blanchett, the head of retirement research at Morningstar, you may be saving more than you need. The key is to look at personal situations and understand variables that may come into play.
In the paper Blanchett states the 70-80% replacement ratio uses three key assumptions that, when combined, overestimate the amount needed for retirement.
- The replacement rate
- Constant consumption levels
- Fixed retirement period
Blanchett also points out there are too many variables that change during retirement, and retirement spending on average does not increase at the same level of inflation. In fact, the higher an employee’s pre-retirement income is, the lower the percentage replaced needs to be. It’s hard to argue that a person earning $200,000 needs to replace as much income as someone earning $20,000 to cover their basic needs.
Blanchett concluded retirees may actually only need to save 50-60%. That’s 20% less than the conventional rule of thumb.
So how much should you save?
While 70 – 80% may be a good place to start, people planning for retirement should look at their own situation first. Questions to ask yourself:
- How healthy am I? How will I pay for medical insurance? How long do I have to wait until I’m covered by Medicare?
- What type of lifestyle do I want to live? Will I want to travel?
- What debts do I have?
- Will I be downsizing my house?
- How much do I want to support my children financially?
- Do I want to leave a legacy for my children or charities?
- Do I have access to an employer-sponsored pension plan?
And one of the most important questions to ask – am I emotionally ready to retire?
All of these answers could influence the percentage amount you should target for replacing income.
For me, it’s about balance. While I certainly save all I can, I also enjoy spending quality time with my family and friends. That is equally important to me as saving. I don’t want to wake up one day and realize that I’m retirement rich, but memory poor. But, if I am lucky enough to have saved too much for retirement, I’ll consider myself extremely lucky.
In addition to blogging here, I also tweet regularly about DB topics of interest. Click to follow me on Twitter- @scottruba.
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