The conventional wisdom says we need to replace 70 percent to 85 percent of our pre-retirement income to have an adequate retirement income. Virtually everyone "knows" this to be a fact. The authority behind this benchmark is impressive. The Social Security trustees use an income replacement rate percentage when they examine current and future benefits. The personal finance press uses it -- witness a pullout in the current Money magazine. It uses 70 percent as an income replacement rate "rule of thumb." Ditto major financial service firms.

But what if that 70 percent to 85 percent figure is wrong?

Many readers have noticed my columns suggesting that we don't need that much. Some, including many financial planners, have questioned my sanity.

So imagine my relief when two respected researchers, using completely different research tools, cast their own doubt on the income replacement rate benchmark.

Both presented at the eighth annual conference of the Retirement Research Consortium.

This is not academic piffle. This is about you and me. This is about real life. If we don't need as much retirement income as convention suggests, many of the dire warnings about our failure to save can be a little less dire. Millions of people may relax a little.

So listen up. You may be better off than you think -- provided you don't celebrate by buying a 60-inch plasma TV using the latest credit card that came in the mail.

Michael D. Hurd, a researcher for the RAND Corp. and the National Bureau of Economic Research, presented a paper titled "Alternative Measures of Replacement Rates." In it, he notes that the fixed percentage idea is "simplistic."


Two big reasons: (1) Retiree consumption changes (declines) with age, and (2) retirees can spend part of their wealth as well as their income.

So Hurd defines the replacement rate as "the amount by which bequeathable wealth either exceeds or falls short of the optimal amount of wealth." The optimal amount of wealth isn't, as some believe, having more money than everyone else.

Optimal wealth is the level of assets needed to sustain your standard of living until the day you die. If you die with some money in the bank, that's OK, too. If you die broke, you didn't have enough money to sustain your standard of living in retirement.

Using a variety of age-related consumer spending surveys, Hurd and co-researcher Susann Rohwedder found that couples were far better prepared for retirement than singles. The median couple, for instance, would consume $33,700 annually while receiving $27,900 in Social Security and pension income. The $5,800 deficit would be easily financed out of their median $262,800 net worth. The researchers' simulations indicate that 78 percent of couples will die with a positive net worth.

Some, of course, will cut it closer than others.

Things aren't nearly so good for single retirees. The simulations show that more than half will likely run out of wealth before death. So they will be forced to reduce their level of consumption in retirement -- unless they are very skilled with the use of credit card offers.

The most endangered group, by this measure, is single retirees with less than a high school education. Those with high school educations are only slightly better off.

Whatever the worries about shortfalls for some, this research indicates that retirement won't quite measure up to the mass desolation that those selling financial products are predicting.

Olivia S. Mitchell, of the Wharton School, and John W.R. Phillips, from the National Institute on Aging, attacked the replacement rate convention another way. Using data from the Health and Retirement Survey, they found that what Social Security calls a 48 percent income replacement rate for the median worker is really a 55 percent replacement rate when other measures of earnings are used.

The difference isn't revolutionary, but it's meaningful to most Americans. For example, the 7 percent difference on an income of $50,000 a year would be $3,500. That means you would need about $87,500 less in your nest egg, assuming a safe annual withdrawal rate of 4 percent.


Scott Burns is the Chief Investment Strategist for AssetBuilder, Inc. and his columns are syndicated across the country. Readers can register at and post questions/comments or send directly to Questions of general interest will be answered in future columns and remember to click on the "Archive" navigation to see other columns. All comments are welcomed and appreciated.