According to conventional wisdom held by some in the financial planning community, many retirement-income plans result in “over-saving,” thanks to the assumption that retirees increase their spending at the rate of inflation each year. Yet according to new and compelling research, this idea is erroneous: seniors tend to decrease their spending gradually over time, unless health care expenses elevate it in life’s final years. In other words, retirees demonstrate a dynamic spending pattern rather than a static one.
Income plans that subscribe to the static-spending theory recommend annual withdrawal rates of 4 percent or less, which makes nest eggs remain sufficiently large to accommodate a yearly increase of spending that keeps pace with inflation. “As a result, their prescriptions conclude that a secure retirement requires more savings and/or years of working than actually necessary,” reports a recent Wall Street Journal analysis.
Over-saving, meanwhile, has several cons that are not necessarily intuitive. Aside from requiring more years of work, over-saving can take away funds needed for other life goals, such as vacations or starting a dream small business. In addition, amassing a very large 401(k) (for example) could subject you to having to pay higher taxes upon making withdrawals.
How to Calculate How Much You’ll Need for Retirement
To know how to save for retirement (and, more broadly, how to prepare your future), strongly consider consulting with a qualified financial planner. However, you can also do your own research and calculations to get a rough idea of what you’ll require. Use several retirement calculators, such as those provided by CNN or MSN, and then add 10 percent. Assuming a seven percent return on investments, estimate the amount of money you need to save each year to meet that goal.
Planning for retirement is one of the most important endeavors you will ever undertake, because it affects the quality of your golden years, and it has implications for your children, the next generation and the legacy you leave. Contact the estate planning attorneys at McChain, Miller, Nissman for a free consultation at 501-221-7776 to develop a thorough strategy.