A Better Rule for Retirement Savings

In 2011, Sue realized that old isn’t just a state of mind. It actually happens. In 2012, Sue plans to figure out how much to save for her retirement by skipping an old rule of thumb in favor of a new approach.

For me, 2011 was the year I finally admitted that I’m getting older. In other words, I’ve realized that getting old isn’t just a state of mind. You can exercise, eat right, color your hair or even use Botox, but aging happens nevertheless.  Of course, as my mother is so fond of pointing out, aging sure beats the alternative!

During this watershed year, I started seriously thinking about how to get all my ducks in a row for my future retirement. I also lined up one duck: I finally got around to consolidating my retirement accounts from past jobs into an individual retirement account that offers more investing options.

My focus in 2012 will be on figuring out how much to save to ensure I can retire with the lifestyle I want. I’m not, however, planning to follow the old rule of thumb that says retirement income should be about 80% of pre-retirement income. In other words, for every $50K I make today, I should expect to spend $40K in retirement.

According to a recent Reuters article, a number of academics are now poking holes in the common 80% approach. They are noting limitations such as that it doesn’t take into account an individual’s personal standard of living and it may cause people to save too much or too little. Other critiques of the 80% figure, meanwhile, have pointed out that it assumes that savers will have the same lifestyle after retiring as they did before.

Instead of focusing on a particular percentage of income, I’m instead planning to base my retirement savings figure on an analysis of what expenses “the Pilot” and I will have when we are both retired. This exercise will start with a look at what kind of lifestyle I envision us having when we retire. Then, I’ll examine which of our current expenses we’ll still have in retirement and what new expenses retirement will bring. This method should give me a pretty accurate estimate of how much I need to save to cover my particular retirement lifestyle.

I already know some of my expenses that will change. When I retire, I won’t, for instance, have such a high weekly dry cleaning bill. Other expenses will likely go up. I don’t drive much now because I’m often traveling for work, but I’m sure when I retire, my gas bill will go up. There’s also all the money I’ll need for our dream trips to Italy and Antarctica, and to spoil our future grandchildren (and no Katie, that doesn’t qualify as a hint).

Of course, once I retire, I’ll then need to figure out how to draw down on my savings. Thanks to my colleague Kevin Feldman, I know not to necessarily follow the approach of withdrawing 4% annually, another retirement-related rule of thumb that may be outdated.

How have you figured out how much to save for retirement?

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