It’s one of the toughest financial questions to answer: How much do you need to save for retirement? Save too little and you might find yourself working at McDonald's during “retirement” — or living with your son-in-law. Save too much, though, and you’ll end up sacrificing the good life today for an uncertain tomorrow.
If you listen to many financial planners (or trust most online retirement calculators), you need to replace 70% or more of your pre-retirement income in order to maintain your current lifestyle. But basing your retirement needs on income is like basing your fuel needs on the size of your car’s gas tank. What really matters is how far you have to go and what kind of gas mileage you get.
To get a better idea of how much you should save, base your projections on your current spending patterns. Your spending reflects your lifestyle; your income doesn’t.
How much should you save?
According to the 2012 Retirement Confidence Survey from the Employee Benefit Research Institute, only 14% of Americans are “very confident” that they’ll have enough cash to live comfortably in retirement. And no wonder: 60% of workers have less than $25,000 saved for old age (not counting home equity).
Which helps explain why the retirement confidence survey shows that 37% of workers expect to retire after age 65. (That number was 11% in 1991.) That $25,000 in retirement savings won’t get you far no matter how low your spending is.
But things aren’t as grim as you might think. According to the survey, 70% of workers expect that they’ll have to work for pay in retirement. In reality, only 27% of retirees report having to do so. What’s more, “almost all retirees who worked for pay in retirement…gave a positive reason for doing so.” In other words, even when retirees have to work, they don’t necessarily hate it.
The 2010 iteration of the Retirement Confidence Survey shows something else that might surprise you. Just about half of retirees spend less in retirement than before (23% spend much less), and 37% spend about the same. Only 13% spend more in retirement — and of those, 6% said their expenses were only “a little higher”.
In other words, your pre-retirement expenses are a pretty good indicator of how much you’ll spend in retirement. That sounds like a great place to start your planning.
There are dozens of retirement calculators scattered across the web, and each is a little different. Some seem more useful than others.
- The Motley Fool has two useful calculators, one that estimates your retirement expenses and one that lets you see if you’re saving enough.
- Bankrate’s retirement calculator bases its results solely on your savings. Moneychimp has a similar, but simpler, calculator.
- Choose to Save has a ballpark estimate tool that you can use online or off (or on your smartphone). It’s the best of the calculators that use income instead of expenses.
For a great combination of simplicity and complexity, check out FireCalc. Though the site can seem overwhelming, its method is actually fairly elegant. It gives you an idea of how safe your retirement plan is based on how it would have withstood every market condition we’ve faced since 1871.
By plugging your numbers into several calculators, you can get a better feel for how much you’ll really need in retirement. But don’t just play with the numbers. Talk with the people you know. Chances are they’ll tell you to save. But if the Retirement Confidence Survey is any indication, they’ll also tell you that things aren’t as bad as you’d think.