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Why Your Retirement Savings May Be Enough After All: How to Retire with Less Money Than You Think You Need

Updated on August 12, 2012

If you're in your fifties or sixties, retirement is looming large on the horizon. Many people are worried about accumulating a large enough nest egg to say good-bye to their careers. The conventional wisdom passed along from financial planners is that in retirement you'll need to replace 80% of your pre-retirement income. Now, a new study published by the National Bureau of Economic Research says that may not be true after all. Two top retirement experts co-authored the study, Susann Rohwedder and Michael D. Hurd. If what they say is true, the amount you need to save for retirement may be far less than you had thought. In fact, you may already have enough savings to retire. The study found that 71% of 66-69 year olds already do. This would indeed be welcome news for many Americans. So if you have some money saved and you're wondering if you can retire, read on.

How to retire when you think you can't:  Reach the summit!
How to retire when you think you can't: Reach the summit! | Source

Conventional Retirement Savings Calculations

Conventional theories on retirement planning say that you should replace 80% of your pre-retirement income in retirement. What this means is that if you earn $80,000 per year just before you retire, you should aim to have income of $64,000 in retirement to live comfortably. Carrying this out further, if you assume that Social Security will cover $1500 per month or $18,000 per year, you'll need to come up with $46,000 per year in income from your own savings or from a company pension, if you're lucky enough to have one. So, in order to produce $46,000 in income, you'll need a nest egg of approximately $1,150,000, assuming a 4% annual withdrawal rate. The 4% rate is another conventional guideline that should allow your money to last until the end of your life.

You can see that this large number is overwhelming and seems near impossible to achieve, especially if your highest salary was $80,000 a year. Many people see this number and give up completely.

How to Retire: Reducing Consumption is Key

What the study found is that consumption is a more important factor in determining the income required in retirement than is replacing a set percentage of pre-retirment income. In retirement, you'll no longer be paying Social Security taxes, contributing to your 401k or IRA, paying high rates of income tax, or encountering work-related expenses. If you have children, they'll (hopefully) be done with college and independent, no longer relying on you for support. Your home may also be paid for. In fact, that's an excellent goal to strive for before retirement. And finally, services that you relied on as a busy worker, such as someone to clean your house and mow your lawn, may no longer be required since you'll have more time in retirement to do those things yourself. All of this leads to much lower monthly expenses in retirement than when you're working and this is what should be considered.

So instead of using the 80% guideline, it makes more sense to look at your patterns of consumption. Take the time to track your monthly expenses for three to six months to really get a feel for what you spend. Then take a look at those expenses and decide which of them would be reduced or eliminated completely in retirement. Also consider which expenses might increase in retirement. For example, your health care costs and entertainment and travel expenses may increase. Then, use your consumption number, padded a bit, to arrive at your target retirement income. This number is likely to be a lot less than the one derived via conventional methods of retirement planning.

For example, let's say that in the above example, you're making $80,000 per year but you're actually living on only $40,000 per year after taking out retirement contributions, mortgage payments, social security taxes, and other work related expenses. Subtracting the $18,000 from Social Security leaves $22,000 per year that needs to come from your own investments. $22,000 divided by the 4% withdrawal rate equals $550,000 required in your nest egg to retire. That's a lot more attainable than the greater than $1 million dollars calculated the conventional way. Reducing your consumption and monthly expenses will result in an even smaller nest egg requirement. It pays to live small.

Nest Egg Requirements to Generate Annual Income

Annual Income to Generate
Required Nest Egg at 4% Annual Withdrawal 

Preparing for Retirement Risk

In addition to saving an adequate nest egg to generate enough income to cover your consumption, you should also plan to set aside some funds to cover the inevitable emergency. In retirement, the biggest risk is related to unexpected health care costs. It's wise to ensure you'll have enough money in a separate fund to cover out of pocket expenses should you or your spouse become sick. This number will vary according to your insurance plan but should not be ignored.

How to Retire With The Money You Have

So instead of focusing on replacing a set percentage of your pre-retirement income, work to understand your consumption patterns and plan to cover those, with a cushion for emergencies. Using this method, you'll have a lot more control over your required nest egg because you can control your consumption to a large degree. You might even find that you have enough money saved to retire earlier than you ever thought.


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      step-by-step 5 years ago

      Totally agree. Since I live off of 50% of my income (including mortgage payments), why would I need 80% when I retire? See Bob Clyatt's book--Work Less, Live More--for a new method of safe withdrawal rate that takes into account poor market performance.

    • SD Dickens profile image

      SD Dickens 5 years ago

      Hi Mike - Thanks for reading my Hub and for your comment. Yes, one would need to account for taxes in retirement but the good news is that they're usually much lower than when you're working. You no longer need to pay into Social Security or Medicare and some income such as those from dividends and some bonds is taxed at a much lower rate.

    • profile image

      Mike 5 years ago

      I liked the article and agree with using the consumption method. However, the article misses the concept of using after tax income to determine the income that is needed.

      In the example with the 80,000 dollar salary and 40,000 dollar consumption, the individual will need after tax income of 40,000 dollars to pay for their chosen lifestyle in retirement. Therefore, they will need at least 50,000 dollars of income to generate the 40,000 dollars to spend.

    • SD Dickens profile image

      SD Dickens 6 years ago

      I agree with you KeithTax, the math is important and its not that difficult. Thank you for the comment!

    • KeithTax profile image

      Keith Schroeder 6 years ago from Wisconsin

      What a well written and researched hub. You have a new fan. I agree with your findings on retirement and more people need to understand these concepts. Retirement is too important issue to take lightly.

      Math turns some people off, but if you don't put pencil to paper, you will never know how much is needed to retire. Keep publishing the message, SD Dickens. A few will get it and that is the most we can hope for.

    • CrazyGata profile image

      CrazyGata 6 years ago from Puerto Rico

      Journal... too bad I don´t get to vote your comment up.

    • profile image

      The Journal 6 years ago

      I work at a bank and see a lot of the concerns you have addressed in your blog. I would say you are spot on with your advice.

      If anyone still watching SpongeBob SquarePants happens to stumble upon this blog, please just save money. To your point about budgeting, so few people seem to save their money or know where it goes each month, that it's no wonder people are as prepared for retirement as they would be for a grizzly bear attack in the middle of the desert.

      Saving just a little bit of money in one's younger years can and will go a LONG way in their older years.

    • profile image

      Petra 6 years ago

      Indeed, if you're close to your retirement you should strive to reduce the % of your money that is in stocks and increase the % that is in bonds, or in a savings account even. Do this with care, don't rush-sell now because you might lose a lot of money on it.

    • profile image

      Web Design Company 6 years ago

      Saving much for your retirement is necessary for you and your family. But the word ‘enough’ depends on how much you save for your own retirement. If you are about to save much, you dont have to worry!

    • SD Dickens profile image

      SD Dickens 6 years ago

      I's tough right now. Hopefully if you're close to retirement you have only a small percentage of your nest egg in stocks

    • CrazyGata profile image

      CrazyGata 6 years ago from Puerto Rico

      I wonder if now, with the DOW around 10k our retirement savings are still enough :S

    • profile image

      Husky1970 6 years ago

      Voted up and useful for this hub. Your financial facts are encouraging as I have been retired now for 5 years and am hoping for many more years. You may enjoy my hub on the 3 H's of Retirement which your hub segways nicely into. Your writing style is excellent and very professional. I'll be sure to check out more of your hubs.

    • SD Dickens profile image

      SD Dickens 6 years ago

      Thanks for the comments Deborah-Diane and CrazyGata!

    • Deborah-Diane profile image

      Deborah-Diane 6 years ago from Orange County, California

      This is very practical information. My husband and I are nearing retirement, and we don't spend nearly as much as we did when our kids were living at home!

    • CrazyGata profile image

      CrazyGata 6 years ago from Puerto Rico

      Saving for retirement and Personal Finance are like my most dearest subjects! Thank you... Not sure about not needing someone to mow my lawn though... :)