You Might Need Less Money to Retire Comfortably

You Might Need Less Money to Retire Comfortably

Amid a steady stream of post-recession bad news about Americans’ insufficient retirement savings comes some good news for a change.

Recent research calls into question the standing rule of thumb that says retirees need the equivalent of 80 percent of their preretirement income to live comfortably in retirement, MarketWatch reports.

Michael Finke, a Texas Tech University professor of retirement planning and living, argues in Research magazine that a replacement rate of 80 percent could mean saving — and possibly sacrificing — more than necessary prior to retirement:

In other words, we’ll be living better after retirement than we did when we were raising a family in young adulthood. And don’t forget that we’re often chipping away at a mortgage early in life that allows us to enjoy rent-free housing in retirement.

For starters, Finke points out that some people are already living off less than 80 percent of their gross income before reaching retirement.

For example, people who contribute 7.65 percent of their paychecks to Social Security and Medicare (or 15.3 percent if they’re self-employed) and set aside another 15 percent of their income for retirement are living off of no more than 77 percent of their income.

“If we were using the economics methods of average lifetime income, we might be closer to 60 percent or even less,” Finke adds.

Finke says retirees also save money because they:

  • Don’t have work-related expenses like commuting costs.
  • Do have federally subsidized health insurance via the Medicare program.
  • Do have a higher standard income tax deduction, and their Social Security is taxed at a slightly lower rate.

Finally, although retirees’ health expenses increase, what they spend on other categories decreases, Finke says.

So the best way to determine an income replacement percentage for retirement might be to disregard the concept of a replacement percentage, Finke concludes:

What we really need to do is maintain our standard of living in retirement. This means figuring out what we spend before retirement, how much of that spending we want to maintain, covering unknown risks of long-term care and any bequest needs, and then figuring out how much we need in savings to close the gap.

How much are you setting aside to fund your retirement? Sound off in our Forums. It’s the place where you can speak your mind, explore topics in-depth, and post questions and get answers.

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