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Are You Saving Too Much for Retirement?
Old 01-07-2012, 09:34 AM   #1
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Are You Saving Too Much for Retirement?

I saw this article on Yahoo this morning. I agree with 70-80% being too high of a percentage of necessary pre-retirement income. I think this number (at least for me) is more like 55-65%. However, it states that an adviser in Texas tells his clients that they can pull out 5.5-6% over the first few years of retirement. They state studies show the older the age class, the less they spend annually. While this may be true, why risk it?



By Linda Stern | Reuters Thu, Dec 1, 2011 12:27 PM EST

Retirement planning almost always starts with one number: A guesstimate of the percentage of pre-retirement income you're expected to need after you retire. That's called the "replacement rate" and is often pegged by industry experts at around 80 percent of a household's earnings.

For example, a recent paper from the Center for Retirement Research at Boston College titled "How much to save for a secure retirement," relies on that 80 percent figure. "Households with earnings of $50,000 and over needed about 80 percent of pre-retirement earnings to maintain the same level of consumption," writes Alicia Munnell, author of the study.

She goes on to say that high earners need to save extremely high percentages of their income -- as much as 77 percent for the 45-year-old just starting to save for retirement at age 62 -- to produce that 80 percent.

The concept underlying Munnell's paper, and a lot of other retirement planning advice, is that you can figure out how much you need to save once you have a number for that 80 percent replacement rate.

But there's reason to believe that oft-quoted 80 percent figure is wildly on the high side. That, in turn, makes the retirement calculations based upon it also wildly off. And that means if you're trying to save enough money to produce that 80 percent figure, you may be putting away too much, or skimping unnecessarily on the early years of retirement.

Now, some academics are taking aim at that rule of thumb. "It's a sometimes bizarre measure that could have absolutely nothing to do with your standard of living," said Bonnie-Jeanne MacDonald, an actuary who currently holds two fellowships, one at Dalhousie University in Halifax, Nova Scotia, and another with the North American Society of Actuaries.

In a recent paper underwritten by the actuaries group and co-authored with Kevin Moore from Statistics Canada, the Canadian government's official agency, she reported that traditional replacement rate calculations have so many limitations and fallacies that they shouldn't be counted on by workers trying to plan their retirement savings.

"For a financial adviser to say you will need 70 percent or 80 percent of your income, and here's how much you have to save, is not very helpful," MacDonald said in a recent interview.

That has big implications for workers who are now exhorted on a daily basis to save more and more, 'lest they run out of money in retirement. If you really don't need 70 percent or 80 percent of your last paycheck for the rest of your life, you don't have to save enough to produce that figure. And saving too much has its consequences, says MacDonald.

"It's not coming from nowhere; it means you're making big reductions in your standard of living before retirement to make your standard of living higher after retirement," she explains.

Here's how to get a better handle on those projections.

Do your own math. Pre-retirees should try to calculate those discredited rules of thumb and estimate their own retirement needs more specifically. Look at how much you're spending now, and see which costs you think will disappear when you retire, or during your retirement. For example, when will you pay off your mortgage and finish helping your kids pay for college? How much will you save in taxes once you're not working? Add in more for costs, such as health care, that could go up.

Look at the data. True spending patterns suggest your first years of retirement will be your most expensive. Consider these figures from the Bureau of Labor Statistics' consumer expenditure survey for 2010:

The average household headed by someone age 45 to 54 spends 57,788 a year. Those years are typically the highest-earning, highest-spending years. Average expenditures for the 55-to-64 age group (which presumably includes workers as well as early retirees) are $50,900; 88 percent of the expenditures for the younger group. Heads-of-household aged 65 to 75 spent an average of $41,434 in 2010, or about 72 percent of the amount spent during those early prime-earning years. And households headed by those over 75? They only spent an average of $31,529, or 55 percent of their peak spending.

That means that even if you do need 80 percent, or more, in your first years of retirement, you will not need that forever. That changes the savings calculus.

You may be able to front-load your retirement spending. That's most likely what you would do anyway, because people in their first year of retirement often spend extra money on special trips, home repairs and new hobbies.

Another retirement rule of thumb says you should pull out only 4 percent of retirement savings in your first year if you want your money to last 30 years. So, if you've saved $500,000, you could withdraw $20,000, or $1,667 a month. But, if you're willing to curtail spending down the road, you could start with bigger withdrawals early, says Christopher Van Slyke, a money manager in Austin, Texas. He tells some of his newly retired clients they can start by pulling 5.5 percent or 6 percent out of their portfolios for a few years, as long as they understand that that rate isn't sustainable for three decades.

Of course, it may not have to be.
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Old 01-07-2012, 09:57 AM   #2
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"Are You Saving Too Much for Retirement? "

No. I've been retired just under five years - DW to follow me, shortly. Do DW/me "have more" than we need (based upon our retirement budget/lifestyle)? Sure. Did we "oversave"? I'm sure we did.

We would rather die with money than live without it...

Our main concern is to have enough (to support our retirement lifestyle). And if we have any left over upon our passing? So be it; it will go to the benefit of those that are still around (money is for the living, not the dead)...

Such articles are worthless, IMHO.
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Old 01-07-2012, 10:10 AM   #3
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Such articles are worthless, IMHO.
+1. Nothing whatsoever wrong with repeating topics here - to be expected as new members join, but we just went in circles on this topic had this debate a few days ago What %age of your pre-retirement income do you need in ER?.
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Old 01-07-2012, 10:17 AM   #4
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I think this is just a guideline for those whose income is "median" for an average US household which is about 50K/year. Then aiming for about 80% of that seems reasonable.

It is true that the first 5-10 years of retirement may be the most expensive due to travel and hobbies.

After that, depending on the age, people tend to stay closer to home and thus spend less.

However, this does not consider lifestyle and luxuries that people indulge in. This can throw out the calc. every easily.

Obviously for those who live with a minimum wage, they will need a bigger%, to maintain living standard, just to correct for inflation.

A person who makes 500K a year, whose house is fully paid, vehicles paid and kids out ofthe house, who decided to follow H.D. Thoreau's lifestyle
will need very small % of his paycheck.

But it pays to save more or too much for retirement cause, we don't know what the future holds.
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Old 01-07-2012, 10:49 AM   #5
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i retired with a net worth of less than 300K with no pension and im 25 years away from social security, i have $180 in my bank account right now and pay my own medical. if you know how to make your money work for you you wont need to work any more.
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Old 01-07-2012, 12:46 PM   #6
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I think this is just a guideline for those whose income is "median" for an average US household which is about 50K/year. Then aiming for about 80% of that seems reasonable.

It is true that the first 5-10 years of retirement may be the most expensive due to travel and hobbies.

After that, depending on the age, people tend to stay closer to home and thus spend less.

However, this does not consider lifestyle and luxuries that people indulge in. This can throw out the calc. every easily.

Obviously for those who live with a minimum wage, they will need a bigger%, to maintain living standard, just to correct for inflation.

A person who makes 500K a year, whose house is fully paid, vehicles paid and kids out ofthe house, who decided to follow H.D. Thoreau's lifestyle
will need very small % of his paycheck.

But it pays to save more or too much for retirement cause, we don't know what the future holds.
Hey birchwood, off topic, but are you in Aberdeen SD? I've got a project going on at nsu right now and have flown out there a couple of times and enjoyed my time there quite a bit.
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Old 01-07-2012, 12:51 PM   #7
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i retired with a net worth of less than 300K with no pension and im 25 years away from social security, i have $180 in my bank account right now and pay my own medical. if you know how to make your money work for you you wont need to work any more.
It's assumed that your net worth is much higher now?
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Old 01-07-2012, 01:01 PM   #8
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in 2 years its grown from 280K to 480K
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Old 01-07-2012, 01:01 PM   #9
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Such articles are worthless, IMHO.
It's not worthless. The article simply points out expenses tend to decline with age so that one can withdraw more at the beginning of retirement but should beware that it is not sustainable indefinitely and of the risk of running out money. However, conservative people who worry about running out of money should continue to save, save, save and possibly postpone early retirement until they feel that they have more than enough to support their style of living forever.
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Old 01-07-2012, 01:02 PM   #10
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in 2 years its grown from 280K to 480K
Congrats. That's a great return.
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Old 01-07-2012, 01:05 PM   #11
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However, conservative people who worry about running out of money should continue to save, save, save and possibly postpone early retirement until they feel that they have more than enough to support their style of living forever.
But is even that enough? Shouldn't one save, save, save and save some more far beyond the extremes you describe? Living like a bum while working your ass off in a job you hate until the day you die is really cool and I appreciate everyone who is doing so.
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Old 01-07-2012, 01:13 PM   #12
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But is even that enough?
I am definitely guilty of this and also struggling with the "one more year" syndrome. Luckily, I still enjoy my work.
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Old 01-07-2012, 01:25 PM   #13
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Old 01-07-2012, 01:45 PM   #14
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Look at the data. True spending patterns suggest your first years of retirement will be your most expensive. Consider these figures from the Bureau of Labor Statistics' consumer expenditure survey for 2010:

The average household headed by someone age 45 to 54 spends 57,788 a year. Those years are typically the highest-earning, highest-spending years. Average expenditures for the 55-to-64 age group (which presumably includes workers as well as early retirees) are $50,900; 88 percent of the expenditures for the younger group. Heads-of-household aged 65 to 75 spent an average of $41,434 in 2010, or about 72 percent of the amount spent during those early prime-earning years. And households headed by those over 75? They only spent an average of $31,529, or 55 percent of their peak spending.

That means that even if you do need 80 percent, or more, in your first years of retirement, you will not need that forever. That changes the savings calculus.
Yes, look at the data. You can see it here Consumer Expenditure Survey Look at the "Age of reference person" table. It shows spending declining as people age - but income also declines, and the >75 age group spends all their income. From that table it appears pretty clear that decline in income is an important factor in lower spending as people age.
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Old 01-07-2012, 01:52 PM   #15
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Thanks for sharing the article as I think this is one of the best I have read on the topic. I could never understand why people would quote the 80% figure based on "income". First of all, I don't spend nearly 80% of my current income (~60%) so why would I need that much at retirement when my largest current expenses (mortgage, child support, kids education) will be gone?

More importantly, as the article points out, all you need to do is take your currrent "expenses" (not income) and sit down and determine the lifestyle you want to live and therefore which expense will need to go up and down and set that in as your goal. For instance, my estimated retirement expenses are going to be about 20% less than my current expenses which would be less than half of current income.

I had also built into my plan an expected intial "5 year boom" when I retire early because I plan to do a lot of travel initially because I have done so little in my life thus far. I had expected my expenses to trail off as I age (not counting inflation), as I forecasted not wanting or being able to do as much. I mean I spend about $1,000 a month in bars and restaurant right now (44). I am sure that won't be the case when I am 75! Glad to see this article sites some stats that shows that is in reality what happens to most. In fact I am not even really worried about running out of money like most are. I plan to defer SSN until as last as possible (70 for me). My current projection shows that will provide a benefit of $3,100 per month. In my worst case scenario where I have depleted all assets, and counting for inflation, I think I could still live on just that plus a small pension ($400/month) I will be getting.

(And no, I am not worried about SSN being cut or going away. They will raise taxes, delay retirement age or do anything else first, to keep from cutting benefits)
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Old 01-07-2012, 06:26 PM   #16
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I think we have to understand that it isn,t just those ready to retire that need a target to shoot at. I can count my expenses since I hope toFIRE in 4 yrs. What about my 28 yr old son? Those not as fixated as the members here may need 80 to get started planning. I'm always interested in another input, even if I don't agree completely.

Sounds like the posters are way beyond a one number fits all, but many many are not.

With my pension and something from SS we can pay the bills so I plan on more draw in early years. My 4% :-)
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Old 01-07-2012, 07:07 PM   #17
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I think we have to understand that it isn,t just those ready to retire that need a target to shoot at. I can count my expenses since I hope toFIRE in 4 yrs. What about my 28 yr old son? Those not as fixated as the members here may need 80 to get started planning. I'm always interested in another input, even if I don't agree completely.

Sounds like the posters are way beyond a one number fits all, but many many are not.

With my pension and something from SS we can pay the bills so I plan on more draw in early years. My 4% :-)
the target "%age" of gross pay should be determined by the following steps.
1) pick a %age of gross pay to save.
2) calculate allowed expenses (AE) using the following AE = gross pay - amount saved - FICA - medicare tax
3) when you are closer to actually retiring adjust AE for differences in spending after you retire
4) determine (using whatever formula you deem acceptable) if the amount saved will grow to the amount needed to provide a yearly WD equal to AE.
5a) if not, increase the %age of gross pay to save and start at step 2 again.
5b) if so, you now have the %age of gross pay you need to save until you retire.
6) if you still want the target replacement of income percentage it is the final AE/gross pay

note: you should rerun these step every few years to make sure you are still on track.
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Old 01-08-2012, 12:37 PM   #18
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I saved about $150-200K last year in 2011 and I live in an expensive area of the country. However, sometimes I feel like I live too frugally. I have no problem spending thousands of dollars on missionary medical work abroad, but I always think twice about renewing a newspaper subscription worth $150
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I saw this article on Yahoo this morning...
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Old 01-08-2012, 11:50 PM   #19
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Here's how to get a better handle on those projections.
Do your own math.
I enjoy Linda Stern's tough love.
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Old 01-09-2012, 06:43 AM   #20
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"It's not coming from nowhere; it means you're making big reductions in your standard of living before retirement to make your standard of living higher after retirement," she explains.
The problem is that for some people, the security of saving a lot for a secure retirement does add a lot to ones current "standard of living" or "quality of life" because of the peace of mind it provides. People who write this stuff don't seem to understand that.
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