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How Much Do I Need To Save For Retirement

February 24, 2012 by · Comments Off on How Much Do I Need To Save For Retirement 

How Much Do I Need To Save For Retirement, Most retirement planning exercises begin and end with a simple question: How much income will you need to replace after you quit work?

But looking at income alone isn’t enough, as spending habits change during retirement — you’re no longer paying FICA taxes, saving for retirement or incurring work-related expenses for clothing and transportation. And saving habits change, too.

A new report from the nonprofit Employee Benefit Research Institute (EBRI) looks at the interaction of income, expenses and savings in retirement. Using survey data from 5,000 retired households from 2000 to 2009, the report details how different socioeconomic groups of older Americans are faring in retirement.

Although the median income for retired households is 57 percent that of working households, retired households spend about 80 percent of what working households spend. More affluent households, which have been able to save for retirement, use those assets to plug the gap between income and spending.

From a retirement planning standpoint, EBRI’s most important finding is that overall spending in retirement falls with age — which means that a retiree won’t need a constant replacement rate of pre-retirement income. The EBRI research also reflects the profound influence of income inequality and job loss on retirement security

“The main reason is that health deteriorates with age, and that means people can’t necessarily do all the things they planned,” says Sudipto Banerjee, research associate at EBRI and author of the report. “Discretionary spending on things like vacations and entertainment fall.”

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