2014
I found this little gem on the NebraskaTV website. Anyone who thinks Americans are saving too much for retirement is not retired.
Could you be saving too much?
It isn’t something you hear every day but one financial expert said some Americans may be putting aside too much of their money for retirement.
Most Americans can’t rely on pensions and plan for their retirement by saving a portion of their earnings. However, they may be overestimating just how much they need.
David Blanchett, of Morningstar Investment Management, found that many people save an average of 20 percent more than needed for retirement.
The long standing retirement rule has been that you need to replace about 70 to 80 percent of your pre-retirement income when you finally decide to stop working.
Blanchett examined expenses and found that number may be too high.
He said people tend to spend the most money in their 40’s and 50’s but noted that spending declines once kids are out of college and mortgages are paid off.
Based on that logic, he said that many people may only need to replace about 50 percent of their pre-retirement earnings.
This means if your average income is around $56,000 a year, social security will cover a good chunk of your likely spending over the age of 65. He did note that those who earn more may need to save more if they want to maintain their standard of living.
Don’t you believe it! 50% of $56,000 is $28,000. The federal poverty level for a married couple is $15,510. Is that how you want to live, on an income not even twice the poverty level?
Using the Social Security Quick Calculator, a person retiring at age 67 in February 2014 who was earning $56,000 at the time can expect a monthly SS benefit of $1569.00 or $18,828 per year which is 33.6% of pre-retirement income.
If you take this advice and want to live on 50% of pre-retirement earnings including Social Security, you will (in this example) need about $124,000 in a lump sum. If you want to make up 100% of your former income you will need about $505,748. Neither of these amounts include survivor benefits, so if you want to provide for a surviving spouse, you better have a great deal of life insurance or save considerably more.
Seems to me there is a big difference between existing and living. Some of your expenses may decline with retirement, but many more will increase (and continue to do so), especially health care and travel and leisure if you want a bit of enjoyment. But on a more practical note, keep in mind that your greatest risk in retirement is longevity. If you start out at 50% replacement how will you keep up with inflation?
You may not be saving as you did before retirement, but you will have to replace any emergency fund if you are hit with an emergency such as property damage, replacing a major appliance, a car and the like. Stuff happens!
I may not be an expert, but I am retired and I have been for several years and I can tell you, your target better be 100% income replacement to start or have a good size slush fund in addition to retirement savings… or plan to watch a lot of TV and not much else.
QUINNSCOMMENTARY 
Today, there are probably a hundred tools out there to project retirement income needs, and whether you are “on track” for a financially secure retirement. Even AARP now has such tools. If you are looking for a disinterested, high quality tool, try “choosetosave.org”.
However, all of these tools, and all of us make the mistake of projecting that the status quo will continue up to whatever date we have selected for “retirement” – however we have defined it. As EBRI retirement confidence survey results show, just doesn’t happen for most Americans.
First, the median tenure of workers in America is between 5 – 6 years, and that has been the situation for the last 40 or more years. As a result, any projection based on the status quo is misleading. It is what hacks me off so much with the stupid proposals of the DOL/EBSA to mandate a projection of benefits for individual account plans up to age 65 or SSNRA or some other stupid target age. Fact is, if you give me your account balance as of today, and you are age 65 today, I can’t confirm for you the annuity you will receive if you were to go out to the market tomorrow and make a purchase. So, such projections are much more likely to mislead than to inform; much more likely to trigger litigation than increased saving (take it from me, when I was in the plan sponsor role, we used to do such projections and we were sued more than once over people’s “reliance” on the projections – despite the disclaimers).
Much like defined benefit pension plan funding, you won’t know the actual cost of the pension plan until everyone actually retires, receives their benefits and dies. So, the concept that people are saving too much may well be true – however, the risk of underfunding retirement far outweighs any risk that retirement will be overfunded (particularly given the solvency of Social Security and Medicare).
The right answer is to build wealth … just in case. .
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I agree completely….for some reason there seems to be a number of “talking heads “out there now suggesting you don’t need to be saving so much for retirement . Ridiculous….my barometer is dna-how long have/did… your parents live is a fairly good predictor of longevity. Of course you need to factor in the state of the economy, economic policies ,inflation etc. It comes down to lifestyle and what you are accustom to as well. If you have been a saver and made sacrifices all your life that’s likely not to change when you retire.However, if you have spent with impunity for most of your life, that’s unlikely to change in retirement either of course and unless you have no choice.
I retired on a pension and luckily on previous investments. I also owned rental property. Rates back in 2006 were great……getting over 5 per cent on my money. I was easily making my full salary at the time i retired. But we all know what happened in 2007-2008. So the party lasted for about 14 months for me personally.
At the time if you were to tell me interest rates would remain this low for as long as they have I would have said you were nuts.But thanks to unforeseen economic policies (probably the most hostile to seniors in decades) I am back to work..at least part time. I don’t mind it much as I enjoy what I do. And I now am collecting SS which helps.
If it wasn’t for my 90 year old mother , I would be out of Jersey in a heartbeat and probably living in South Carolina or Florida. By the way, guess what state has the largest numbers exiting (to other states/locations)? New Jersey….I believe for the third year in a row. I would surmise that seniors or those close to so-called retirement comprise a large percentage of those who have exited .
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Bob, good response to Dick. The key words you used were “we sacrificed”. Not something most younger generations do. ” I want it now” and there goes the plastic card issue. We learned to wait till we could pay for it. Most important today is most companies don’t have pension plans so it is up to the individual to SAVE for the future. I was one of the lucky ones, 43 years with the same company, good pension, and great 401K that was a model plan. I got dollar for dollar match. Most plans were only 50/50. It grew fast. New Jersey was just not in the financial plan for our retirement so Florida was our choice.
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I still disagree with you on this. Most people’s definition of retirement doesn’t include two trips to Europe per year, a second house, a month long trip to Florida every winter, etc… I think it’s awesome that you guys have the ability to do that stuff (and I plan on being able to have that kind of lifestyle also) but it’s not what most people expect in retirement. I’m not saying people expect to sit in front of the tv but downsizing their house, one big vacation/trip per year and some decent spending money for golf would probably be heaven for most people. That doesn’t require 100% of pre-retirement income. Let’s put it this way, my retirement savings, college savings and commuting expenses are about $50,000 per year. That doesn’t even take into account that I won’t have a $2700 per month mortgage, pre-school expenses, diapers, having to feed only two instead of a family of 5, etc… That’s an awful lot of travel and leisure money, even if you triple the amount of money I contribute to healthcare.
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You miss the point. Perhaps my example of travel as an added expense was misleading, but the point is still valid. I see nothing, not even the absence of a mortgage, that will allow the average person to live on 50% of pre-retirement income. That leaves no room for error or unpredictable expenses. What in their life will change so radically that allows such a cut in income? Assume a person retires at 65, by then their home should be mortgage free (in theory) so we are saying on one day they can live on $56,000 and the next day on $23,000… only if work related expenses are $23,000 a year. What other expenses change so radically? And should a person have to sell their home and move to another state to retire?
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Moving out of NJ was exactly what we did. Example: My taxes in NJ were $10,000 in 2005, now they are $15,000. Taxes in Florida are $2200 for a house larger than NJ. We have no income tax in Florida and NJ does. Just a couple of examples. We are able to live very comfortably here in FL where I don’t believe we could in NJ. We saved all of our working life and did well. We can golf, take trips and live comfortably with no mortgage. Retirement is GREAT, but we worked and save wisely to get where we are.
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Dick, I think part of the problem here is that it is very difficult to envision what retirement actually means until/unless you are in it. Its kind of like loosing your vision or hearing a little at a time…suddenly you wake up one day and recognize something has changed and for some people the change is dramatic. How people respond to this change is what retirement strategy is all about and many times people have to re-act “on the fly” as it were.Some are better at it than others and I think much of this is a matter of personal choice, the ability to use critical judgement, learn from experience and one’s values.
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