BUSINESSWEEK ONLINE : MARCH 22, 1999 ISSUE
PERSONAL BUSINESS

Commentary: Saving for Retirement: Don't Believe the Happy Talk


How much should you be saving for retirement? The question sends chills up people's spines. Only 45% of working Americans have even tried to calculate what they should be adding to their nest egg, says the 1998 Retirement Confidence Survey, sponsored by the Employee Benefit Research Institute (EBRI).

So Kenn B. Tacchino brings what ought to be a welcome message: You don't need to save as much as you feared. Tacchino, who teaches financial planning at Widener University in Chester, Pa., says he has found a flaw in the worksheets, Web sites, and software that calculate savings needs: They all overestimate how much older retirees spend and exaggerate the amount workers need to set aside. And needlessly high goals, he says, may actually deter people from saving. Writing in the Journal of Financial Planning, he urges advisers to set modest goals--cutting the target by up to 30%--to spur savings.

Tacchino's calculations are interesting, but his conclusions don't stand up under scrutiny. Planners and economists say few are driven into inaction by knowing what they need to save. Given the hurdles to a comfortable retirement, people are better served by a plan that boosts savings.

Retirement models usually figure you'll live comfortably on 80% of your pre-retirement income. In Tacchino's reasoning, they go wrong by assuming an 83-year-old spends as much as a 66-year-old. He says consumption falls as retirees become less active. Medical expenses do rise, by as much as a third. But that's offset by drops in spending for food, 31%; clothing, 42%; transportation, 34%; entertainment, 51%; and housing, 20%. As a result, people over 75 spend 16% less than those between 65 and 74. That means a saver can assume a 72% income replacement rate, not 80%, Tacchino says.

So should we cut back on our savings? No, because lower targets boost risks, with little benefit in inducing more savings. Underestimate inflation, or overestimate portfolio returns, and you'll be in the red when it's too late to recover. Nursing home costs are a special danger. Tacchino says every senior needs long-term care insurance, but fewer than 5% have it--and the steep premiums aren't included in his calculations.

Instead of lower goals, Americans need easier ways to figure their savings needs and follow through. The American Savings Education Council (www.asec.org), also backed by EBRI, has a Ballpark E$timate calculator. For those ready to save, proposed federal tax breaks--including higher retirement account limits--would help. Studies show that half to two-thirds of Americans aren't prepared for retirement. The last thing they need is an excuse to save less.

By Mike McNamee
EDITED BY AMY DUNKIN

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