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Diligent Savers Need Less for Retirement

ONE RULE OF THUMB says that, for a comfortable retirement, you need enough savings and other sources of retirement income to replicate 80% of what you earned while you were in the workforce. But few retirees hit this lofty goal and, for those with good savings habits, it may not make sense to try.

To understand what’s at issue, consider two examples. First, imagine that, while you were working, you saved around 10% of your income each year and you lost another 7.65% to Social Security and Medicare payroll taxes. Both those drains on your income would be gone once you retire, so aiming to have retirement income equal to 80% of your working income would likely give you a similar amount of disposable income.

Next, imagine that you were a great saver who socked away 25% of income, rather than 10%. Clearly, you’re used to living on a relatively small portion of your paycheck. Result? To maintain your standard of living after quitting the workforce, you might need a nest egg and other sources of retirement income that together will give you not 80% of what you used to earn when working, but perhaps just 65%.

Next: Nudging Yourself to Save More

Previous: How Money Saves You Money

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