On Oversaving for Retirement

Could You Be Oversaving for Retirement?

Excerpt:

The 80% replacement rule — which means workers should aim to replace that much of their pre-retirement income — is hardly a one-size fit-all model. Blanchett argues that the figure may be much lower for some workers, considering that some expenses, like taxes for Social Security and Medicare, work-associated costs like commuting, and pre- and post-tax retirement savings contributions all but disappear once you retire. On the flipside, it could wind up being higher for other workers, especially if they live in a state with a high income tax or expect to put their grandchildren through college. When Blanchett looked at four households earning between $37,500 and $225,000 a year, and factored in what they would need to have once they were no longer paying for these expenses in retirement, he found their ideal replacement rates varied widely — as low as 54% and as high as 87%. “Although a rule of thumb replacement rate of 70% to 80% is clearly reasonable, it isn’t ideal, and moreover, it is clear that the replacement rate is sensitive to the proportion of pre-tax expenses and post-tax expenses,” he says.

Comment: My own take is that we have under-saved and that we started about 10 years too late. Most recent projections for us see us retiring a bit later: Kathee at 65 ... me at 67 (3 more years)