If you’re telling clients they’ll need 75% to 85% of their current income to have a good retirement, they may be saving too much, says Larry Kotlikoff, an economics professor at Boston University.
“Millions of Canadians follow this formula. Yet, there is no guarantee this approach is consistent with a savings plan that will allow them to experience their optimal standard of living — given their income — throughout their working lives,” say Kotlikoff and his partners.
He teamed up with the University of Calgary’s School of Public Policy to create ESPlanner, a free online income-smoothing calculator. It can model how much money someone needs in retirement, taking into account income, public and private pensions, taxes, mortgages, children, marital status and other expenses.
The program determines how much someone can spend as well as how much she should save in order to maintain her lifestyle from now until she dies, without going into debt.
It uses consumption smoothing to prevent people from unnecessarily sacrificing their lifestyles now in the name of their retirement security, says Kotlikoff.
Often, the software shows that, in order to have a comfortable retirement, people need to save a fraction of the amount they’re putting away now.
“The replacement rates that the industry is using tend to be much higher than the economics suggests,” says Kotlikoff.
The software is an empowering educational tool, he says, because it allows everyday Canadians to estimate how much to save without having to run through thousands of complex calculations. “What you should do is very household-specific,” he adds.
People should run the calculator every year, to make sure their necessary savings rates haven’t changed in light of new taxes or interest rates or other expenses.