Your Money_ The Missing Manual - J. D. Roth [140]
A Better Way
If you're going to base your savings goals on how much you'll spend in retirement, you've got to have a way to gauge your future spending. Will your expenses increase or decrease? That depends in large part on your health and your plans. If you get sick or travel a lot in retirement, for example, your expenses may go up. In general, though, your expenses will likely stay about the same. According to the Employee Benefit Research Institute's 2009 Retirement Confidence Survey (RCS):
49% of retirees spend less in retirement than before (26% spend much less)
35% spend about the same as before retirement
14% spend more in retirement (though 7% say their expenses are only "a little higher")
Overall, 65% of Americans spend about the same or only slightly more or less in retirement. That means their pre-retirement expenses are a good predictor of their post-retirement expenses.
Note
You can download the full EBRI report for free from http://tinyurl.com/EBRI-rcs. It's filled with tons of data about Americans' attitudes toward retirement—and the realities of being retired.
Expenses often drop in retirement because your kids are out of the house; your mortgage is gone—or nearly so (one of the surest steps toward retirement security is to pay off your mortgage); you have no commuting costs or other work-related expenses; and, ironically enough, you no longer have to save for retirement. Sure, you'll have other expenses—especially health care—but if you've been smart and planned ahead, you should be in good shape.
Make no mistake: You will need a sizable nest egg for retirement—especially if you have ambitions to travel or want to golf every day. In fact, you should save as much as you can. But don't be snookered by the constant refrain that you need 70% of your pre-retirement income. That's nonsense—base your savings goals on your projected expenses instead.
The moral here? Don't panic—you can save enough for retirement. In Retire Well on Less Than You Think (Times Books, 2004), Fred Brock writes:
Most people can retire from wage slavery sooner than they think if they are willing to pay a relatively painless price for their freedom: a simpler, downsized life and, perhaps, a move to a less expensive part of the country—and it doesn't have to be remote or far away.
The key is to live within your means now, which lets you boost your cash flow so you can accumulate savings for later in life.
Retirement Calculators
Enough theory! You're probably ready for some hard numbers. In that case, you can get a quick estimate of how much you'll need to save by heading online. There are hundreds of retirement calculators scattered across the Web, and each one is a little different. Because this is all a guessing game, no one calculator is necessarily better than any other, but here are a few I've found especially insightful:
T. Rowe Price has an excellent calculator that bases its results on your spending needs: http://tinyurl.com/TRO-rcalc.
The Motley Fool has two useful calculators, one that estimates your retirement expenses (http://tinyurl.com/fool-rexp) and one that lets you see if you're saving enough (http://tinyurl.com/fool-enough).
Bankrate's retirement calculator (http://tinyurl.com/BR-rcalc) bases its results solely on your savings. (MoneyChimp.com has a similar—but simpler—calculator at http://tinyurl.com/MC-rcalc.)
Choose to Save has a ballpark estimate tool (http://tinyurl.com/ballparke) that you can use online or off. It's the best of the calculators that use income instead of expenses.
For a great combination of simplicity and complexity, check out FireCalc.com. This site may seem overwhelming at first (there's a lot of text to read), but it's actually fairly elegant. What it does is give you an idea of just how safe or risky your retirement plan is based on how it would have withstood every market condition we've ever faced since 1871. All you do is enter how much you've saved,