Scary Retirement Predictions Don't Have to Ruin Your Life


Why have predictions about retirement become so dour and hopeless?

Maybe it's the seeming lack of understanding that so many retirement experts seem to have on the topic. Consider some recent advice:

  • A study from Fidelity recently said that by age 35, you should have savings equal to your annual salary. By 45, that number should be up to three times your salary, rising further to five times by age 55. By retirement age (67), eight times your salary is the appropriate target -- understanding, of course, that your salary has probably risen steadily all along the way.

  • Consulting firm Aon Hewitt is even more aggressive, arguing you should have 11 times your salary saved up by age 65.

  • A contributor to Forbes set lofty and aggressive goals for how much you should save throughout your lifetime, arguing that even teens need to start saving significant amounts. If you start at age 15, saving 8% of your annual income for the rest of your life should be sufficient. But wait until age 35, as many people do, and you'll have to kick up your savings rate to more than 30%.

This last approach isn't as bad as it may seem, because it recognizes that when you boost your savings rate, you're actually accomplishing two valuable things. First and foremost, you're putting aside more money that you can use later. But the equally important accomplishment from boosting savings is that you're learning to live on less money now, which in turn can reduce your lifestyle expectations for the rest of your life, including after you retire.

The Better Way to Ensure Retirement Success

Still, the major flaw in all of these studies is that they make completely unrealistic assumptions about saving behavior.

Like taking vitamins and going to the gym every other day, we all know we're supposed to save for retirement. The challenge, though, is making that task real. With so many pressing needs on our time and financial resources right now, the idea of planning for something that's decades away requires a radical shift in the way you think about your money.

Although putting aside a fixed percentage from each and every paycheck works for some people, many have a lot more trouble avoiding the unexpected problems that can force you to make changes to your saving strategy – and they feel like once they've missed a single month there's no point in trying to get back on track. And return assumptions are only as good as the predictions they're based on. The last several years should have convinced you how tenuous a connection some predictions have to eventual reality.

So instead of driving yourself crazy trying to save 30% or more of your paycheck to make up for lost time, consider this simpler strategy:

1. Save what you can. The real point behind rules like saving 10% to 15% from each paycheck is to get you used to saving and to get your portfolio balances moving higher as quickly as possible. But if you can cut your spending more, don't limit yourself -- put aside even greater amounts. Conversely, if you're going through a rough patch, don't beat yourself up; try to save something even if it doesn't match your usual target.

2. Stay flexible. Most studies assume that you'll need 80% to 90% of your pre-retirement salary to retire on. Only you can determine how realistic that figure is, but many have found that they spend far less in retirement, in part because having more time gives you flexibility to take advantage of deals that you may not have had the opportunity to use earlier in life. You can live on a much smaller nest egg if you control discretionary spending after you retire.

3. Invest better. Saving won't do you much good if you're only earning 0.01% in a bank savings account. Retirement investing is all about risk, and as scary as the stock market may be, it's a great place to earn the long-term returns you'll need in order to reach your retirement goals. Whether you go with simple index funds or learn enough to choose individual stocks, better investing will leave you with more money when you need it.

Scary retirement predictions make great headlines, but they don't have to ruin your life. If you can craft these concepts into your own personalized retirement savings plan, they'll serve you well.