Study shows we need to save more for retirement. A lot more !



How much do I really need to save for retirement?

So earlier I tackled the issue of how much to save for retirement. A lot of advisors suggest that when we strategize for retirement, we will probably need to plan on spending some fraction of our current income. In one study, 70% was the most commonly quoted figure. The logic is that you wont have children in school, your house will be paid off, you will be spending less on work clothes etc. In a previous post I argued that this logic might be flawed. I suggested that we should save like we are planning on spending our entire current income in our “golden years.” So if you are currently earning  $100k today, you should plan on spending that every year in retirement. Turns out  my estimate may be way off – and that you will likely need a lot more! A new “study” published in the Wall Street Journal suggests that in order to live the life style we imagine, the average person will need to be able to spend – on average – 130% of their current income.  Notice I put the “study” in quotes. That's because the methodology was not clearly revealed so the research may or may not meet the standard of a peer reviewed publication; nevertheless it seems well done and its very interesting.

How is it possible that we would spend more money when we retire then when we work? Its simple. When we are employed we spend most of our week tied to our jobs. There is little opportunity for spending. Oh sure, the occasional café late or ordering lunch out, but Monday to Friday we cannot spend any “real" money. Come the weekend and we go out for dinner, we shop, we spend money of leisure activates. Now imagine everyday is Saturday! In their study, a group of participants were asked specific questions about how they wanted to spend their time in retirement. The questions focused on 7 specific areas: eating out, digital services, recharge, travel, entertainment & shopping, and basic needs. Based on their answers, the folks running the study attached real world costs and discovered that on average, people would need to make 130% of their current income to live the lifestyle they wanted. You can find the full text of the article here – but you will need to be a subscriber – you do subscribe to the Wall Street Journal, don't you?  There is even a spreadsheet so you can try to calculate your personal future needs. 

Already there is some backlash against this study. One interesting article posted in the Financial Times claims this to be outrageous because the Wall Street Journal article measured retirement wants and not retirement needs. They go on the demonstrate that to meet ones “needs” a person would only need about 83% of their current income.  Fair enough, but since when is retirement about just meeting ones needs? Don't we all have bigger aspirations for retirement than sitting in a rocker watching Netflix?

So what is the correct income to plan for in retirement? Well one thing is for sure – the 70% of income rule is long dead! Even the conservative Financial Times claims that to just meet our needs on average we will need about 83% of our current income.  Over the next few days I hope to play with the Wall Street Journal retirement planner and see what percent of income I will need. I’m betting it will be a whole lot more than 70%! If you have the chance, work the numbers and let us know what percentage you will need!