Dan Kadlec had a very interesting post for the Money Magazine website (via Barry Ritholtz) titled Half of Workers Are on Track to Retire, Well Here’s How to Join Them. Most of the article was devoted to how much people of different ages need to save from each paycheck in order to catch up with some of the numbers being so large as to be discounted in the article as being unrealistic.

The interesting part though was how Kadlec framed how much really needs to be saved. Basically your nest egg needs to produce enough income to replace 34% of your pre-retirement income (the article suggests an annuity but I am not a fan of them) and Social Security will replace 36% of your preretirement income getting you to the 70% rule of thumb.

This makes the task of saving far less daunting. If you make $100,000 you need to save $850,000 ($34,000/0.04=$850,000). That is still a lot of money but likely to frighten far fewer people than being told you need a $2 million nest egg.

While the simplicity of Kadlec’s premise is excellent there are some detail items that are suitably altered for this audience. As opposed to some rule of thumb, like 70% of preretirement income, the focus should be on actual expenses. For some people expenses will go up and for some they will go down. There is no short cut for crunching your own numbers. If planned correctly, there may be no more mortgage and there probably will be no more saving for retirement. The expense of working (commute, dry cleaning and the occasional lunch out) will probably go down but the expense of hobbies and leisure activities (this might include time with grandkids) will probably go up. At some point health care expenses will probably also go up.

Taxes may not go down as much hoped for. Someone with all of their assets in IRAs will pay some tax on their withdrawals (not a certainty depending on the amount of the withdrawal and how much comes in from any other sources of income).

Another expense that people often expect will go up is travel although realistically there will be very few people who can take a $10,000-$20,000 trip every six months. One issue that we have discussed many times here is the type of one-off expenses that cannot be budget for like new tires, large vet bill, new roof and the list goes on and on. While there are all sorts of one-off events, different ones seem to pop up every month or two. It would not be crazy to pad your monthly budget by $1000 to account for one-offs and then if there is anything unspent at the end of the year it could be applied to a big trip.

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