| WASHINGTON, June 25
WASHINGTON, June 25 Only cave dwellers have
missed the boom in retirement-planning studies: what seems like
a daily barrage of industry-funded surveys and white papers
pointing to an aging population so woefully unprepared they will
have work until they are 90, brown-bagging cat-food lunches when
Now one of those new studies, from a respectable and
data-focused investment firm, is taking some of the pressure off
individuals who may worry that they can't possibly save enough.
"The savings rates we show (as necessary for retirement) can
be achievable," said Marlena Lee, the researcher who did the
study for Dimensional Fund Advisors, an Austin, Texas, company
that is known for its low fees and highly analytical approach to
designing mutual funds.
To understand Lee's research, you have to understand the
math behind retirement planning. Here are the basics: A
pre-retiree should estimate how much annual income she will need
in retirement, subtract projected Social Security and pension
income, and then aim to accumulate roughly 20 to 25 times the
amount that is left by retirement. That is a conservative way to
insure that you can pull 4 percent a year (plus an inflation
adjuster) out of your portfolio every year and not run out of
money over a long retirement.
Typically, retirement studies guesstimate the amount you
will need by deciding what percentage of your final salary you
need to replace. The replacement rate is often an alarmist 75
percent or 80 percent - yielding a figure that can make
pre-retirees throw up their hands (and 401k statements) in
Lee's research debunks that figure with actual data on
retirement spending. She finds that the more you make, the lower
your replacement rate needs to be, because of line items like
high working-year taxes that disappear in retirement for high
earners. The less you make, and the higher your presumptive
replacement rate, the more of it Social Security will cover.
That is good news for both groups.
It is only the bottom quartile of earners - those who make
under $26,000 - who need as much as 82 percent of their working
income to live comfortably in retirement. Social Security will
replace the bulk of that, leaving that group to replace 23
percent of their final salaries - a maximum of $7,280 a year
from savings - without any future belt-tightening.
By the time you are earning between $50,000 and $87,000 you
only need 62 percent of your last salary to live on, and Social
Security will supply half of it. The top earning tier will need
58 percent of income. Of that, Social Security will cover 21
percent, leaving 37 percent to be replaced through savings,
pensions or cost-cutting, according to Lee's research.
All of which means the amount of savings needed is less than
you might expect. Lee's conservative calculations suggest that
to have a 90 percent certainty of covering a 40 percent
replacement rate, low earners starting young would need to save
5.3 percent and the highest income groups 12.8 percent of their
But most people probably wouldn't need to save as much as
that because (1) nobody in Lee's study turns out to need a
replacement rate as high as 40 percent; (2) she uses a
conservative stock/bond allocation model that has investors
holding large amounts of lower-earning bonds instead of
higher-earning stocks as they get older; (3) she uses
conservative estimates of returns for stocks and bonds; and (4)
she isn't counting on employer matches in 401(k) savings or any
other sources of retirement savings or income. An investor could
make up a savings deficit by investing a higher percentage in
stocks - or by earning more on them - than Lee assumed.
The takeaway for workers is not to give up saving, of
course. The more cash you have when you hand in your employee
ID, the easier your post-work life will be - and nobody knows
exactly how much healthcare costs could eat up in the future,
with medical costs often rising faster than overall inflation.
Last year U.S. healthcare costs rose 3.58 percent, according to
the Labor Department.
The other important lesson for pre-retirees is that you
should worry less about the scare studies (like a recent one
from the National Institute for Retirement Security that showed
the typical "near retirement" household had only $12,000 in
savings, but excluded other household assets and did not adjust
for income level) and think instead about the particulars of
your own situation.
Consider how much you will actually spend in retirement
based on your own tax rate and lifestyle, instead of plugging in
a replacement rate. Factor in any inheritances, pensions,
company matching payments and higher salaries as you age. Lee
suggests younger, low-earning workers can save less to start and
make it up later as their earnings increase.
"Some advice can be oversimplified," said Lee. "The focus of
our research was to figure out, out of all these moving parts,
which are the important ones to consider." Your own income
determines how much you can afford to save. That, it turns out,