Another Flawed Retirement Savings Analysis

I have spent a lot of time thinking about the best way to estimate how large of a nest egg  we will need to retire.  I have concluded that there is only one practical way to do this and it involves creating a comprehensive retirement spending budget. Many so-called experts suggest using an income replacement ratio or an income multiplier to arrive at a retirement “number.” In my humble opinion, that is a flawed approach.

So what did I discover today? Another analysis by a “benefits consultant” that concluded that a typical worker who wants to retire at 65 will need to save 11 times their final salary to maintain their lifestyle in retirement.

This is just a ridiculous generalization.

The New York Times Bucks blog wrote about the study. One of the commenters explained the flaw perfectly:

Assume that retiree A earned $50k annually his last year of retirement and spent every penny.

Assume that retiree B earned $100k annually her last year of retirement, spending half and saving half. (Certainly possible for a semi-frugal empty nester.)

Retiree A and retiree B have the same pre-retirement standard of living: $50,000 in annual lifestyle spending.  Yet, according to the “study”, retiree A needs to have saved $550K to maintain that standard of living in retirement while retiree B is supposed to have saved $1.1 million.

Is this even close to making sense? No.

Why do people even publish these reports?  Will it scare folks? Yes. Will it scare them so much that they just say “it’s hopeless” and give up? Possibly.

You cannot draw conclusions like this based on averages or medians.  You have to determine retirement savings needs based on personalized spending needs and patterns. Ideally, most pre-retirees are saving and investing a substantial portion of their pre-retirement income and/or using income to eliminate mortgage debt. They won’t need to replace that portion of their spending when they retire.

I created a retirement spending plan and budget for us three years ago even though I have no plans to stop working in the near future. I update that budget regularly with current data. I use that budget to set savings targets for us.  I use that budget to determine our investment risk tolerance. That is the way it should be done. Everything else is a rule of thumb gimmick.

Do you agree or disagree?

Here are links to the full report and to the NY Times blog post about the report.






An Estimate for Needed Retirement Savings –


  1. Steve Crawling to the Finish Line says

    Hmmmm, I didn’t know health care costs in retirement will be based upon my pre-retirement income and set on a sliding scale. Isn’t that the inference from stupid studies like the one in the NY Times?

  2. Jerome says

    Your method is very good, but in the real world out of reach for most people. They just don’t want to or can’t do ‘complicated’ planning. And for those people the 70% rule works very nicely thank your very much. And in fact it is not that bad, provided you have no mortgage left and the costs of working, like commuting and expensive clothing, are gone.
    Me personally, I use a method probably comparable to your method. I retired at 41 and I have a 60 year cash-flow planning with income flows from 11 different sources. And everything inflation- and risk-adjusted. Lets see whether it works out the way I planned! :)

  3. missi says

    One should look very carefully into studies like this. Each situation is different.

    I live overseas, 30 something, and my job doesn’t pay into retirement. I have to do everything myself. My situation is really unique, so studies like this make me want to go, blah. Being in another totally changes my retirement rules and situation.

  4. Kathleen Olona says

    The person making 50K and spending it all isn’t going to have any savings according to your logic, so what does it matter if they need 550K or 1.1 million- either way they won’t have it. It is a generalization. Most people are not so frugal that they save 50% of their income.

  5. Doris says

    Every retirement scenario is different for each individual. It depends largely not on the total amount of your assets that you have saved but whether or not you or your spouse receive a guaranteed pension benefit. In our case, both my husband and myself each have pensions—his is from the IBEW and mine, from the federal government (FERS). This makes a huge difference as a protected income stream and you don’t have to draw down assets too quickly in your IRA’s or other investment vehicles. Couple that with Social Security payments , we are doing just fine. I have no intention of taking any monies from my TSP plan until I reach age 70and1/2. We also have rental income of $1100 per month on a residence that is part of our projected retirement income. I would never had retired if I needed a million dollars (equating this with the income we had before we both retired) to afford my standard of living. My costs are a lot lower now that I am retired. I guess whoever does these projections are not including (or assuming) that some of us folks have pensions to bolster our income or have no other means to support ourselves in our retirement years.

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