You Need More Retirement Savings

How much income do you need in retirement? The personal finance literature is filled with rules of thumb, like 60% or 85% of your pre-retirement income. But Brett Arends suggests a simpler, albeit more difficult estimate: your current disposable income.

Oh, sure, we can all name reasons we'll need less: no work clothes, no kids to put through school, and (in theory) we'll have paid off the house. On the other hand, most of us do not spend 30 years of our working lives putting kids through private four year colleges (something that, at any rate, should be saved for, not cash flowed unless you're a zillionaire.) And while it's easy to think of the expenses that you won't have in retirement, fewer people think about the new expenses retirement brings. Like, unless you're planning to spend your golden years planted in front of the television, or ambling through the woods in back of your house, you're probably going to want to spend money doing things: travel, golf, clubs and family. Even many cheap hobbies aren't that cheap if you're doing them five hours a day, every day.

Maybe you think you'll stop eating out so much, and cook at home more, now that you have time. Be warned that if you're the type who likes to cook, when you have a lot of time on your hands, you'll probably be most interested in trying new (aka expensive) things that require spices and equipment you don't have--not in pouring Campbell's Cream of Mushroom over some defrosted chicken breasts.

There will also be expenses that you didn't have when you were younger. Your health expenses will go up, and contrary to what you may have been imagining, Medicare does not cover everything--Medigap insurance is costly, and may still leave you with considerable out-of-pocket expenses. There are associated costs, too, with getting older--you frequently have to pay people to do things that you no longer have the energy or physical ability to do yourself. Assisted living isn't covered by any of the major programs, and it's quite costly.

And you shouldn't necessarily count on being able to sell the big house and downsize to something cheaper. You could get caught in a down market, like now, when it's hard to sell. And in most places, small houses cost more per square foot than big ones. Every house needs some basic stuff--foundation, kitchen, bathroom, furnace/hvac/hot water heater. The smaller the number of rooms, the higher the cost per room for these basics. This effect may be even more exaggerated as the boomers retire and try to sell their big, peak-earning-years houses to my much smaller generation. Obviously, you can sell it at some price, and ceteris paribus, a smaller place will cost you somewhat less. But the benefits may not be as great as many people are anticipating.

So "about the same amount as I need now" is not necessarily a bad guide. But as Arends goes on to point out, it's a very frightening one. Even assuming that Social Security continues as promised, most people don't have nearly enough saved to make up their current incomes. And really, if you're an investment banker, that's not that big a problem--you'll have to downgrade to a merely ostentatious house and consider flying business class instead of first. But most of us aren't investment bankers. We'll need a lot more than we're saving now.