Over the years we've seen this hoary phrase parroted by dozens of publications and writers. While it's an easy thing to cough up on deadline, one number certainly doesn't account for people's income, spending, & saving habits either before or after retiring. Frankly it torpedoes credibility more than it educates the public.
I don't have a link to the source, but I'd read it was a 1980s economic study noting that commuting/workplace expenses were 20% of an employee's spending. But now I've learned* that Aon Consulting has actually been updating the original data with their concept of "replacement ratios".
After years of study, they've noted that "replacement ratios" depend on... (drumroll please)... people's income, spending, & saving habits both before & after retirement.
Aon Consulting’s sixth report on the level of income needed by an employee in retirement again answers the basic question "How much income will I need in retirement to maintain my standard of living?" In this iteration of the
Replacement Ratio Study, we attempt to reflect new realities resulting from the changes of the past decade by providing alternative answers to this basic question.
The primary data source for this information is the U.S. Department of Labor's Bureau of Labor Statistics' Consumer Expenditure Survey (CES). This is essentially the same database used to construct the Consumer Price Index. The CES is done annually, and we used data from the most recent years available — 1999, 2000, and 2001. CES data provided information on 9,738 "working" consumer units and 5,642 "retired" consumer units. In total, this represents approximately 80% more consumer units than have been available in prior years.
The table and the graph on the following page illustrate three significant points about the replacement ratio calculations:
1. Social Security replaces a larger portion of preretirement income at lower wage levels. This is by design and has the effect of redistributing income from higher paid employees to lower paid.
2. Total replacement ratios are highest for the very lowest paid employees. This is because these employees save the least and pay the least in taxes
(as a percentage of income) before retirement. Thus, they spend a higher percentage of their income and need higher replacement ratios to maintain that level of expenditures.
3. After reaching an income level of $60,000, total replacement ratios begin to increase slowly. This is primarily because post-retirement taxes increase as income levels increase.
So the answer to the question "How much will I need to retire?" has been updated from "80%" to "It depends." It's not much help or comfort, but now you can read the original data & analysis and draw your own conclusions.
*From the footnotes of "What Color is Your Parachute?-- For Retirement", a pretty good book on all aspects of ER, not just the money.