Expert: Don't Save Too Much for Retirement
Expert Suggests That Some People May Be
Overestimating What They Need for Retirement.
NEW YORK (AP) -- If you're tired of all the
talk that you're not saving enough for
retirement, you'll be happy to hear the
latest: People may be overestimating what they
need in their Golden Years.
People
generally spend less in retirement as they
age, regardless of income, according to a
recently published research paper. It's one of
those things that "everyone kind of knows" but
that isn't reflected in traditional
retirement-planning strategies, says Ty
Bernicke, a financial planner with Bernicke &
Associates in Eau Claire, Wis., who supports
his theory with data from the Bureau of Labor
Statistics.
Traditional
financial-planning strategies often assume
retirement spending rises over time due to
inflation. In reality, spending goes down with
age and inflation pulls it back up, leaving most
people with retirement spending that remains
fairly constant from the start of retirement
until death, Bernicke said.
In his paper,
which was published by the Journal of Financial
Planning this month, Bernicke illustrates how
traditional calculation methods can distort what
people think they need to save for retirement.
Under a traditional planning method, a married
couple who retire at 55 years old and spend
roughly $60,000 a year would see their spending
needs rise to $145,635 a year by the time they
reach age 85. The reason for the rise: An
inflation rate assumption of 3 percent a year on
top of expenditures that start out at $60,000 a
year.
If this couple's
nest egg equals just $800,000 plus Social
Security payments of $12,000 a year, they would
be told that they could run out of money by age
81. They would probably also be told that they
need to work a few more years to boost their
savings or risk living off Social Security in
their later years.
That $800,000
nest egg goes a lot further, however, when the
assumption is that spending drops with age.
Under Bernicke's model, the same couple would
spend only $67,963 by age 85 with inflation, a
rise of just $7,963 compared with a rise of
$85,635 under the traditional model. The
$800,000 nest egg would, therefore, not only
last past age 81, it would grow, allowing the
couple to live without fear of running out of
money.
Bernicke's first
hint that people tend to overestimate their
retirement spending came from his father, Barry,
the founder of Bernicke & Associates. "When I
first got into the business he had mentioned
this to me and it made a lot of sense," said
Bernicke.
After several
years of watching his father's predictions come
true, Bernicke decided to support the theory
with numbers. By reviewing the U.S. Bureau of
Labor's Consumer Expenditure Survey, he found
that people ages 75 and older tend to spend half
of what they spent between the ages of 45 and
55.
Health care costs
are the only costs to rise as people age,
according to Bernicke's data. Everything else --
including entertainment, housing costs, food and
transportation -- falls, resulting in an overall
decline in spending.
Bernicke doesn't
believe this decline is due to a generational
phenomenon. He looked at data from as far back
as 1984 and found a consistent decrease in
spending by age from 20 years ago.
The one wild card
is the cost that might be required for long-term
care, like a nursing home, said Bernicke. People
in nursing homes are unlikely to be represented
in the data set because they are unlikely to
participate in the Bureau of Labor Statistic's
survey, Bernicke said.
Consultancy Aon
Corp. has been looking at the same Consumer
Expenditure Survey data for several years and
has found similar results, said Mike Schachet,
an Aon senior vice president. Aon's message has
been a bit different, however, in that it has
focused on how people's retirement spending
needs are changing over the years. Someone who
needed 67 percent of his or her pre-retirement
income to retire several years ago may need 75
percent today, according to Aon's research.
Bernicke's
message is that the financial-planning community
should be aware that they may be pumping up the
numbers due to erroneous assumptions about
spending and inflation.
Bernicke's
research has struck a chord with financial
planners who have long felt that traditional
retirement-spending calculations are misleading.
"It's an absolute
fact that as people get older they spend less
money," said Rick Ferri, president of
money-management firm Portfolio Solutions in
Troy, Mich. |