Socking Too Much Away
Forget the common assumption. Some people may be saving more than they will need for their golden years
Jones and others recommend high-end retirement calculators that use so-called Monte Carlo simulations to offer guesstimates about retirement. Instead of just spitting out an estimate of how long your nest egg will last, they consider a variety of scenarios--good markets, bad markets, in-between markets--and offer odds on whether your plan will succeed or fail.
For example, such a calculator might analyze your finances and report that there's a 68 percent chance that you'll meet your goal and a 32 percent chance you won't. "Folks are aiming for plans that have a success rate in the 75-80 percent range," Jones says. "If you try to develop a plan with a higher level of success, it gets very expensive."
Bernicke, the counterintuitive financial planner, likes the Monte Carlo calculators. But he says they make the same mistake as many planners and figure you'll spend the same amount every year throughout retirement. "I don't necessarily think that's a bad thing," he says. "But a lot of people are retiring a little bit later than they could because of these calculators."
Bernicke is not aware of any free or low-cost calculators that don't make the traditional assumptions. (According to Bernicke, some financial companies have adjusted their planning software to take into account his report on spending patterns, but the software isn't designed for the public to use.)
The calculators have another hitch: They can't track every variable in your portfolio, and they may miss hazards that can cause serious damage to your financial future. Mandatory IRA distributions, for example, can take a huge bite by bumping up a retiree's tax bracket, financial adviser Ferri says. "That's what's really going to whack retirees down the road. It's unbelievable when you run the numbers," he says. "For those who have large IRAs, the big hit for them is not medical or housing. It's taxes." But retirement calculators might not pick up on the problem. "There's much more that goes into this than using some simple thing off the Web," Ferri adds.
10 percent solution. If you don't want to hire a planner or dislike wrestling with a calculator, there are a few rules of thumb. Some experts suggest that most people will do fine by simply saving 10 percent of their pretax income for retirement. But even that's debatable: The T. Rowe Price brokerage recommends that its clients invest a whopping 15 percent. "We were trying to find one size that fits all," says T. Rowe senior financial planner Christine Fahlund. "If you just tell people you need to save more, they don't listen to you."
Once you're actually retired, advisers frequently recommend not spending more than about 4 to 4.5 percent of your savings each year. Bernicke, an iconoclast once again, suggests that the number can actually go up to 6 percent.
And what if you do save too much and work longer than you had to? Brokamp, the retirement newsletter editor, says that might actually be fortunate. "Personally," he says, "I think it's not such a bad thing to keep working. You can find several studies that show that unless you're a very active retiree, retirement is not that good for you."
If you do end up with lots of money during retirement, Ferri suggests you do something about it. "People live their whole lives scrounging and scrimping, trying to make sure they take care of themselves for retirement. Now, they've got well in excess of what they need to retire and don't live as well as they could be living given their situation. I keep telling people: Take the trip around the world. .? You don't want to be the richest man in the graveyard."
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