Saving for Your Retirement? Forget the Rules of Thumb

Saving for retirement has become the mantra of personal finance in the last few years, and there is evidence that baby boomers and younger adults are getting the message.

But when it comes to specifics--how much income will I need in retirement, and how much do I need to save to obtain that--a great many people remain mystified. And with good reason.

Although there are rules of thumb for relating pre-retirement to post-retirement income, common sense suggests, and experts agree, that such guides are meaningless for people whose lives don’t follow the average pattern.

And almost no one is average.

The rules of thumb historically have put retirement income needs at roughly two-thirds to three-quarters of pre-retirement earnings. But one company that closely surveyed its workers recently found that to maintain their pre-retirement standard of living, retirees actually needed anywhere from 30% to 95% of their working income--a huge range.

The variation resulted from differences in lifestyles, health, retirement age and family situation. For example, retirees who had started families late in life and consequently still had children in college found they needed virtually the same income during retirement as while working. Others who were still working off big mortgages or loans for kids’ tuition were in much the same boat.

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The uncertainty is spurring corporations and pension experts to try to work out formulas to help employers and workers figure out what really needs to be saved.

It isn’t easy.

A key question for retirees is the extent to which their expenses will decline because they no longer have to go to work. Commuting expenses are reduced and there will be less need to buy lunches downtown. Payroll taxes disappear. There will be less need for white-collar workers to keep up a wardrobe and for blue-collar workers to replace work clothes.

But these considerations vary tremendously too. Some workers virtually always bring their own lunches and have no special work clothes.

Traditional methods of measuring these reductions tended to treat them all as a flat percentage of income. More detailed studies, though, show that such costs generally are higher in dollar terms but lower as a percentage of income for better-paid workers.

Likewise, according to a study by Sylvester J. Schieber of Watson Wyatt Worldwide and some colleagues, the savings that result from retirement follow a similar pattern. Lower-paid workers generally see a lesser saving in dollars but a greater one on a percentage basis.

For example, a non-retired household earning $22,500 in 1993 spent, on average, $991.39 a year on clothes, Schieber found, but retirees with the same income spent $686.20, or about 31% less. At the same time, a working household earning $85,000 laid out $2,152.64 for clothes, while retirees at the same income level spent $1,565.89, or about 27% less.

But people are not consistent, Schieber found. When it comes to food, high-income households save a lot less as a result of retirement, both in dollar and percentage terms, than do low- and middle-income families. For incomes between about $15,000 and $40,000, retired households consistently averaged $60 to $70 less a month in spending for food than workers of the same income.

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But above $40,000, savings in retirement decline markedly.

“If upper-income people naturally eat more expensively, additional leisure time in retirement gives them greater opportunity to either get involved in creative culinary activities or to go out to eat more often than when they were working,” Schieber said.

It’s also possible that with the children grown, cooking is the chore people are most eager to shed.

Tuition likewise yielded odd-looking numbers. It turned out that on average, couples nearing retirement age were spending a few hundred dollars a year on tuition. Those with incomes of $27,500 were spending $201, while those with $85,000 were spending $566.

But those were averages. The median tuition expense--half spending more and half spending less--was zero for most income categories. That suggests that most of these couples aged 50 to 64 had no tuition costs, but a few had very large ones.

The study also underlines the value of a good traditional pension plan and retiree health-care benefits.

Though traditional pensions have been criticized as not well adapted to a highly mobile work force, Schieber’s figures show that such plans can be very beneficial to long-term employees.

Take the case of a 20-year-old who went to work at a company with an average pension--one replacing roughly 1.5% of pay for each year of employment at the company--and who had real wage growth of 1%. This worker would have to save only 1.4% of income annually to retire at 65 with a standard of living comparable to the one he or she had while working. (This assumes Social Security will provide its current level of benefits.)

If the pension were more generous than average, the savings requirement would be zero. And if the employer also provided retiree health insurance, the worker could retire at 62 with no personal savings.

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On the other hand, a 40-year-old worker who joined an average plan with no retiree health insurance would have to save 10.7% of income to retire at 65 without a standard-of-living change. A 50-year-old would have to save 25.4% a year under the same circumstances to retire at 65.

It’s little wonder that few people even try to figure out how much they need to save for retirement. However, no one is going to save for you, and if you don’t do it, chances are you’ll have to do without in retirement--or even do without retirement.

If you work for a large employer, check with your benefits or personnel office. They can at least tell you whether you have a pension, what kind it is and how much you’re likely to get. You can also write to the Social Security Administration.