Could your clients be saving too much for retirement? Sounds contrary to conventional wisdom, but it’s possibly true, says one researcher.

A new study authored by David Blanchett, head of retirement research for Morningstar Investment Research, took a deep dive into whether the conventional “replacement rate” of 70 percent to 80 percent of pre-retirement income holds true for most people. While he concludes those ratios are generally a good starting point for most, the actual replacement rate varies by life expectancy and a household’s saving and spending habits.

Many financial advisors use that 70 percent-to-80 percent benchmark, factoring in a rise in inflation over a 30-year time period, Blanchett notes in his paper, “Estimating the True Cost of Retirement.” In general, he concludes that many retirees may be overestimating the amount truly required to fund a secure retirement.

Using government data on consumer expenditures, as well as a simple market and mortality model, Blanchett turns those assumptions on their proverbial heads. For instance, rather than using the standard 30-year time horizon, he recommends examining a couple’s actual spending patterns over their life expectancy. By doing so, he contends that many retirees may need approximately 20 percent less in savings than previously believed. He further asserts that inflation has a negligible impact on a retired household’s outlays. Rather, spending typically trends below inflation through most of retirement until the latter years when expenses increase due to higher health-care costs.

How much a household has saved for retirement and their spending habits also have a significant impact on the replacement rate, Blanchett says. Specifically, households with lower levels of consumption and higher funding ratios tend to boost spending during retirement while households with higher levels of consumption and lower funding ratios are more likely to reduce their spending in retirement.

Therefore, Blanchett advocates a more personalized approach when devising how much a retiree needs in retirement. The replacement rate could vary from under 54 percent to 87 percent, depending on a retiree’s unique circumstances, goals and taxes.

He uses the example of a high-income couple living in California, which has a high state income tax. They have saved a substantial amount for retirement; but if they retire to a state with no income tax, like Texas or Florida, that couple’s replacement rate would be closer to 60 percent.

However, a low-income couple that has saved very little for retirement but moves to California would need to replace around 85 percent of their pre-retirement income.

“It’s important for investors to consider their level of pre-retirement household income, expenses that discontinue after retirement (such as Medicare and Social Security taxes and retirement savings), and post-retirement taxation,” Blanchett states in a release detailing the study.

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