Saving Too Much For Retirement

More of the retirement planning industry is catching on. For decades, retirement plans revolved around simple rules of thumb such as that you’ll spend about 80% of your pre-retirement income during retirement. At Retirement Watch we’ve warned for decades about these simple rules of thumb. They likely cause you to save too much or too little for retirement. As people finally are realizing, everybody’s retirement is not the same. Some will spend less in retirement and be very content, while others will spend much more to meet their goals. This article in The Wall Street Journal (subscription might be required) lays out the details. The point, as I’ve always said, is to decide the lifestyle you want in retirement and estimate how much that will cost. Don’t rely on rules of thumb or someone else’s experience.

But if you’re closer to the finish line, it’s crucial that you figure out for yourself how much you personally will need in “replacement income”—or the percentage of your working income you’ll need in retirement—so you can get a better idea of whether your savings, any pensions and Social Security can provide it.

“You really need to fine-tune it,” says Cindy Levering, a retired actuary who serves on a retirement-research committee for the Society of Actuaries, a professional group in Schaumburg, Ill. “There are so many things that are specific to the individual, it’s hard to generalize.”

The actual replacement rate swings widely by household, with many people overestimating the real costs of retirement by as much as 20%, says David Blanchett, head of retirement research at Morningstar in Chicago, which issued a report on retirement income earlier this month.