Are You Saving Too Much for Retirement?

Retirement planning almost always starts with one number: A guesstimate of the percentage of pre-retirement income you're expected to need after you retire. That's called the "replacement rate" and is often pegged by industry experts at around 80 percent of a household's earnings.

For example, a recent paper from the Center for Retirement Research at Boston College titled "How much to save for a secure retirement," relies on that 80 percent figure. "Households with earnings of $50,000 and over needed about 80 percent of pre-retirement earnings to maintain the same level of consumption," writes Alicia Munnell, author of the study.

She goes on to say that high earners need to save extremely high percentages of their income -- as much as 77 percent for the 45-year-old just starting to save for retirement at age 62 -- to produce that 80 percent.

The concept underlying Munnell's paper, and a lot of other retirement planning advice, is that you can figure out how much you need to save once you have a number for that 80 percent replacement rate.

But there's reason to believe that oft-quoted 80 percent figure is wildly on the high side. That, in turn, makes the retirement calculations based upon it also wildly off. And that means if you're trying to save enough money to produce that 80 percent figure, you may be putting away too much, or skimping unnecessarily on the early years of retirement.

Now, some academics are taking aim at that rule of thumb. "It's a sometimes bizarre measure that could have absolutely nothing to do with your standard of living," said Bonnie-Jeanne MacDonald, an actuary who currently holds two fellowships, one at Dalhousie University in Halifax, Nova Scotia, and another with the North American Society of Actuaries.

Another retirement rule of thumb says you should pull out only 4 percent of retirement savings in your first year if you want your money to last 30 years. So, if you've saved $500,000, you could withdraw $20,000, or $1,667 a month. But, if you're willing to curtail spending down the road, you could start with bigger withdrawals early, says Christopher Van Slyke, a money manager in Austin, Texas. He tells some of his newly retired clients they can start by pulling 5.5 percent or 6 percent out of their portfolios for a few years, as long as they understand that that rate isn't sustainable for three decades.