Saturday, February 25, 2012

Saving Too Much for Retirement?

This is heresy: a study published by the Urban Institute finds that if everyone followed the advice of financial planners, many would have saved too much for retirement.

"The traditional rule of thumb that one should aim to replace 80 percent of preretirement income is clearly misguided," says the Urban Institute's Austin Nichols. Instead, he says, "one should aim to save enough so that spending does not need to drop precipitously in retirement."

Rather than focus on an income target, Nichols suggests that workers should focus on a spending target when planning for retirement. "The constant savings rate required to equalize consumption across the preretirement and postretirement years generally is much lower than the 80 percent rule," he writes. To save enough to equalize spending in retirement, a married high earner who starts saving at age 45 and plans to retire at age 62 needs to save only 34 percent of income each year rather than the 59 percent that would be required to achieve 80 percent of preretirement gross income. "Americans are not necessarily saving too little for retirement," Austin concludes.

Source: Urban Institute, Do Financial Planners Advise Us to Save Too Much for Retirement?

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