It’s an oldie but goodie; part of a perpetual debate. What is the appropriate “replacement rate” to target when saving for retirement?
Conventional wisdom pegs it at 80%. But Reuters’ Linda Stern wonders if, despite the mountain of reporting about America’s lack of retirement readiness, it might be too much.
“[T]here’s reason to believe that oft-quoted 80% figure is wildly on the high side,” Stern writes. “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% figure, you may be putting away too much, or skimping unnecessarily on the early years of retirement.”
“It’s a sometimes bizarre measure that could have absolutely nothing to do with your standard of living,” Bonnie-Jeanne MacDonald, an actuary who currently holds two fellowships, one at Dalhousie University in Halifax, Nova Scotia, and another with the North American Society of Actuaries, told Stern.
And Stern points to a recent paper co-authored with Kevin Moore from Statistics Canada, the Canadian government’s official agency, which find that traditional replacement rate calculations have so many limitations and fallacies that they shouldn’t be counted on by workers trying to plan their retirement savings.
“For a financial adviser to say you will need 70% or 80% of your income, and here’s how much you have to save, is not very helpful,” MacDonald said in a recent interview.
For a more accurate calculation, Stern suggests the following: