Retirement planning almost always starts with one number: A guesstimate of the percentage of pre-retirement income you're expected to need after you retire. That's called the "replacement rate" and is often pegged by industry experts at around 80 percent of a household's earnings.
For example, a recent paper from the Center for Retirement Research at Boston College titled "How much to save for a secure retirement," relies on that 80 percent figure. "Households with earnings of $50,000 and over needed about 80 percent of pre-retirement earnings to maintain the same level of consumption," writes Alicia Munnell, author of the study.
She goes on to say that high earners need to save extremely high percentages of their income -- as much as 77 percent for the 45-year-old just starting to save for retirement at age 62 -- to produce that 80 percent.
The concept underlying Munnell's paper, and a lot of other retirement planning advice, is that you can figure out how much you need to save once you have a number for that 80 percent replacement rate.
But there's reason to believe that oft-quoted 80 percent figure is wildly on the high side. That, in turn, makes the retirement calculations based upon it also wildly off. And that means if you're trying to save enough money to produce that 80 percent figure, you may be putting away too much, or skimping unnecessarily on the early years of retirement.
Comment: Our story. We did not even think about retirement until 20 years ago. Well I thought about it for a long time (I have a degree in finance!) but we really did not begin to seriously save for it until 20 years ago when Kathee was hired by Norwest and she began to save in a 401K. There is no way we will come close to the 80%.
The best plan: start saving right out of college. Maybe: give 10% and save 10% (my Pastor recently suggested this).