The Danger of Keeping Things TOO Simple With Retirement Planning

With a lot of personal finance, it makes sense to keep things simple or otherwise choose the method that works best for you. Just as the best exercise is the one you’re actually going to do, the same is true for the best budgeting or money management system. When it comes to investing, simple strategies typically work better than more complex ones.

Finding your retirement number isn’t that simple

But while varying money management and investment systems can get you to the same place (saving enough and being properly diversified, respectively), this isn’t necessarily true when it comes to figuring out how much you need to save for retirement. For example, this article I recently read in USA Today called “Simple to complex: 4 ways to find your retirement number” seems to suggest that there are 4 valid ways of figuring out how much to save:

  1. Save 15%
  2. Save $1 million
  3. Save enough to replace 80% of your income
  4. Save enough to fund your projected retirement expense

This advice can be dangerously simple.

Why saving 15% might not be enough

For example, the 15% number is cited in a Fidelity article that uses this as a guideline for someone starting at age 25 and saving until age 67. Let’s put aside all the built-in assumptions about your income, employer match, investment returns, and income needs in retirement. Instead I’m asking how many people reading this article are actually age 25 or younger? 15% may make sense as a default contribution rate for retirement plans since many people getting their first job out of school tend to stick to the default, but it can be dangerously low for someone starting much later.

Why $1 million might not be enough

What about $1 million? Using a 4% withdrawal rate, that would produce about $40k of inflation-adjusted income each year for 30 years. For someone with higher income needs, that may not be enough. For others, it can be such an unnecessarily high bar that they feel they’ll never be able to retire and are discouraged from saving at all.

Taking it to the next level

If you’re going to take the time to calculate how much you need to save in order to reach $1 million, you might as well take just a few more minutes to use a relatively simple but far more effective retirement calculator like this one. If you don’t want to take the time to project your retirement expenses, you can use the third method in the article and simply target an 80% replacement of your current income.

That’s because people typically spend less in retirement on housing (you may have a paid-off home and/or downsize), other debts that may be paid off, children, etc. You also won’t be saving for retirement when you’re retired so you won’t need that income either. While you may need less, few people will absolutely NEED more. (If you’re planning a more lavish retirement, you can always target a higher income replacement percentage.)

Factoring in all the variables

While it takes just a few minutes to use the calculator, it will take into an account variables such as your projected Social Security, pension, and other retirement income, current age, planned retirement age, and current retirement savings balance and contribution rate for both you and your spouse if married. You can also adjust your assumed life expectancy, inflation rate, and investment returns.

By playing around with the calculator, you can see how much any of these variables can drastically affect how much you need to save to reach your goals. You may need to save a lot more or a less than 15% to have a lot more or a lot less than a $1 million in retirement. When it comes to retirement planning, keep it simple…but not TOO simple.

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