The Big Error Most Experts Make on Retirement Savings

Portrait Of Senior Couple Enjoying Day In Park
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When it comes to how much money you should save for retirement, most experts share this general rule of thumb: You should save enough to generate 75 percent to 85 percent of your pre-retirement income. Most experts are wrong -- and if you follow their advice, you could be creating trouble for yourself.

To Plan Ahead, You Need to Look Forward, Not Backward

The 75 percent to 85 percent rule is based on a false assumption. It implies that you currently spend every dime you make (minus the 15 percent to 20 percent you should save for retirement). But how many people really live this way?

If you already spend a lot less than you earn, following this rule would mean you'd wind up putting aside far too much for retirement. And, while this isn't a bad thing by any means, it prevents you from using that extra money for other things in the present, such as your kids' college funds or a down payment on a house.

Smart money management is all about allocating your money so that it works hardest for whatever goals you've set for yourself. Having lopsided goals defeats the purpose.

On the flip side, if you spend a lot more than you earn, following the 75 percent to 85 percent rule won't give you nearly enough to enjoy a comfortable retirement. If you're spending more than you earn today, chances are you've accumulated considerable credit card debt and other loans. Paying that down will take a chunk out of any savings you manage to set aside. Besides, you'll need to seriously reconsider the standard of living you intend to maintain once you hit retirement and are on a fixed income.

What You Should Do Instead

A better strategy is to aim to replace 85 percent to 100 percent of your current expenses. This makes much more sense, for a number of reasons:
  • Your current income really has nothing to do with your retirement needs. Rather than artificially basing your savings goal on whatever number your boss has set your salary at, you're saving based on exactly how much you plan to need to live on once you reach retirement. It's less arbitrary and more reality-based.
  • Living expenses change over time. This new approach factors in the ways your living expenses will change between now and retirement. You'll probably live pretty much the same way you do now (unless you're one of those over-spenders we touched on, in which case you've got some thinking to do). But you'll be dropping some expenses when you retire (your commute, work clothes, and, one hopes, your mortgage) and adding new ones (golfing, travel, supporting your 26-year-old son who still lives in your basement). You need to plan ahead for these changes.
  • Retirement brings on extra expenses. Basing your savings on your current salary doesn't take into account the additional expenses that can arise when you reach retirement age. From caring for aging parents to dealing with the Medicare "doughnut hole" (a gap in Medicare Part D prescription drug coverage), there are certain expenses you'll be forced to handle. You need to be able to provide yourself with a financial cushion should those things come to pass. Only a savings plan based on estimated expenses, not current income, can allow you to do this.
No one can accurately predict how much money they'll need when they retire. Life happens, and things change. But if you focus on setting aside 85 percent to 100 percent of your current expenses, you can rest easier than most people do.

Paula Pant ditched her 9-to-5 job in 2008. She's traveled to 30 countries, owns six rental units and runs a business from her laptop. Her blog, Afford Anything, is a gathering spot for rebels who refuse to say, "I can't afford it." Visit Afford Anything to learn how to shatter limits, quit your job and live life on your own terms.

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So true that you need to think ahead. Make a plan at and do your best to stick to it. But it's also true that money now might not be worth as much in the future and things are getting more expensive. Remember when milk wasn't almost $4 a gallon? That kind of increase can probably be expected to continue...

May 07 2014 at 6:20 PM Report abuse rate up rate down Reply

I think 'PE12427' is the most complete information of any blogger on here ~

However, I would add a #5 -
Healthcare coverage

If you don't have this, your medical costs will just chip away at your savings.

April 08 2014 at 10:17 PM Report abuse rate up rate down Reply

Tom says I am whining. He won't face facst that his socio political system, called American capitalism is bleeding.

My God, after all we have been through since 2007 to see this kind of comment shows that Americans are very, ver financially illitarate and marinated in this culture of go it alone individualism, I got mine you get yours, attitude. ssThe moral back bone of this country is broken

April 08 2014 at 8:06 PM Report abuse +1 rate up rate down Reply

Waiting to begin saving.

April 08 2014 at 5:40 PM Report abuse rate up rate down Reply
1 reply to jdykbpl45's comment

Good. How long you gonna wait? Could be a lifetime and if you are lucky enough to put food on the table and go through the agony of ten sor fifteen jobs a lieftime that pay little to nothing with no benefits then you best get a piggy bank

April 08 2014 at 8:07 PM Report abuse +1 rate up rate down Reply

I figured you would need more in retirement than when working unless you just want to sit in a rocker on the front porch...which is just what most of us will be lucky to afford.

April 08 2014 at 4:56 PM Report abuse -2 rate up rate down Reply
1 reply to gway1958's comment

Not so, says Tom and the creew like 'dopey'. Go get a job they say. They are brainwashed of course and when the economic tsunami hits they will run like rats without a head.

April 08 2014 at 8:14 PM Report abuse +2 rate up rate down Reply

Experts? The same ones who run Wall St? If you retire you will be lucky to do so in a FEMA camp

April 08 2014 at 3:06 PM Report abuse +1 rate up rate down Reply

This article is absolutely correct, present earnings have little to do with retirement expenses. Every future retiree should sit down and try to estimate retirement expenses as best they can. Look at future housing costs, i.e. property taxes, utilities, and especially maintenance as one should budget at least 10% of the value of your house to maintaining it. Look at car costs, insurance, gas, maintenance again. Look at vacation costs, how much will you travel. Look at every day costs, like food, entertainment, subscriptions. Look at medical costs, remembering that Medicare will be a lot less than you are paying now if you pay for your own insurance. Doesn't take much to do and you can be fairly accurate, especially if you add a 20% fudge factor for taxes and other expenses.

Speaking of taxes, if you rely on Social Security for most of your revenue, remember that Social Security has many good tax benefits. Many states exclude SS from taxes and a couple can make upwards to 64K a year before even a dime of SS is considered income. (The calculation is complicated, so I will not elaborate here.)

Couples should maximize SS for the major bread winner. There are several options married couple have in getting SS, such as the major bread winner getting spousal benefits at Full Retirement Age (66 for those born before 1955) and waiting to claim SS based on his/her earnings until 70. The major reason for doing this is that should the major bread winner die first, the surviving spouse will take over the higher payouts. Do some thinking and just don't grab SS at 62 like many people do. Remember, you are stuck with that lower payout the rest of yor life. So don't jump at it.

In fact, I think the biggest mistake married retirees make is not planning for one of them dies. Pensions and SS should be taken with survivor benefits in mind so that the surviving spouse is not left broke when the pension and SS payouts from the deceased spouse go away.

As for revenue, maximize SS as it goes up with inflation, doesn't require constant vigilance and has special tax benefits. Invest in high quality dividend paying stocks like Johnson or Proctor and Gamble that pay a solid 3% dividend that increases every year and therefore keeps up with. inflation. Or invest in a good dividend paying no-load mutual fund or ETF.

Do all these things and you will have a great retirement. This is what I did and I am doing quite well.

April 08 2014 at 1:11 PM Report abuse +2 rate up rate down Reply
1 reply to Dave's comment

This is very sad. Most Americans have no retirement options other than work for the rest of their lives. They are mired in debt, cannot find affordable housing or health care, have corporate health care, corporate politicians and no chance for retirement. You will work until you die

April 08 2014 at 3:09 PM Report abuse +2 rate up rate down Reply

Prepare yourself for some "sticker shock" the first full year after retirement if you were employed and lucky enough to have a good retirement plan. Pre-retirement, payroll deductions simplified tax planning. Post-retirement, it is incumbent upon the tax payer to do so and that requires a little effort. For example, some or all of your social security income may be taxable if your additional income reaches certain levels. You may have been "DRIP"ing dividends and receiving interest and covering the tax liability with increased payroll deductions. When that first tax bill is received after a year of retirement you might be surprised by a considerable shortfall plus penalties (both Federal and State). I say the first year because, after that, you will likely start making estimated quarterly tax payments. Save a few bucks in penalties and having to come up with a large chunk of cash at tax time by anticipating what you will make that first year and start paying that estimated tax in the first quarter.

April 08 2014 at 11:35 AM Report abuse +1 rate up rate down Reply
1 reply to drbobdez's comment

No wonder they call you 'dopey'. Can't you see this is a socio economic problem of a capitalist system in crisis. Go to any city and look at the homeless and poor and tell them they made bad decisions. The individualistic mind is so, so ill

April 08 2014 at 8:04 PM Report abuse +1 rate up rate down Reply

SPQR hit the nail on the head. The sad truth is that a large percentage of Baby Boomers lived for today and did not save nearly enough for the future to live on a 4% withdrawal. For these spenders, they are in for a rude awakening, i.e. their standard of living will go down or they will be forced to work longer, thus delaying retirement (perhaps indefinitely).

April 08 2014 at 10:46 AM Report abuse +3 rate up rate down Reply
1 reply to razov's comment

Tell 'Dopey' and Tom that and you will be labeled a communist. This is how the American mind works.

April 08 2014 at 8:19 PM Report abuse +1 rate up rate down Reply

Simply putting money away in the bank is not a strategy. In 1974 gas was 34 cents a gallon. Today it's $3.67 Because of inflation, your savings become erroded. At one time you could invest in common stocks which tended to at least keep up with inflation, now even stocks are in question.
The only real strategy is to insulate yourself from thing that are indexed to inflation, primarily your bills. How do you get rid of a bill ? Some of them you can't but most of them can be eliminated or greatly reduced.
Instead of savings, use it to pay off everything - the house, the car, all of it.
You can eliminate your water bill by gettng your own pump.
You can't eliminate your electric bill, but you can reduce it by upgrading to higher SEER rated equipment and applliances. If your insulation is thin, have it upgraded.
In areas with Sun, solar energy will help.
Trade in your gas guzzling model for one that gets 50 mpgs.

April 08 2014 at 10:39 AM Report abuse +1 rate up rate down Reply