Responding to my recent column on the Retiree Income Replacement Project at Georgia State University, reader Alton Trull sees a lot of potential--- and relief--- in the portion of our income devoted to savings and debt service.

He writes: "I did a little back of the envelope figuring and came up with this. A person making $80,000 a year pays around $6,000 in employment taxes a year. If they save six percent in their 401(k) that's another $4,800 a year. If the principal and interest portion of their house payment is $1,000 a month, that's another $12,000 a year. The total is $22,800 a year.

"So if a person had their home paid off when they retired, they would need $57,200 to live at the same level, which is 71.5 percent."

That's much lower than the 85 percent rule of thumb commonly used by the financial planning community.

Alan Stuber had similar thoughts. He comments, "…it would be worthwhile for your readers to better understand what underlying assumptions go into the Retiree Income Replacement Project calculations. Intuitively, it would seem that the amount of replacement income would be heavily influenced by housing expenses (mortgage/rent) and other debt carried over into retirement."

Exactly so!

The Georgia State project uses broad consumer survey data on savings to adjust retirement income requirements. Since most people don't save very much--- which is why 2/3's of all retirees get at least half of their income from Social Security--- the adjustments are small. They also don't reflect things like paying off a home mortgage or other debt.

The immediate consequence? People who have all their debt paid off by the time they retire have a lower replacement income need. And, presto, their nest egg can be smaller.

How much smaller?

Lots. Each $1,000 of annual income you don't need to replace eliminates the need for $25,000 of nest egg.

You can understand the impact by following me through a specific example. The GSU project shows that $80,000 of pre-retirement income requires an 81 percent replacement rate. With 35 percent coming from Social Security, that leaves 46 percent, or $36,804, from savings. To produce that income safely, you would need (Are you ready for this?) a $920,100 nest egg.

But suppose you were paying off consumer credit that absorbed 8 percent of your income, or $6,400 a year? Suppose the debt would be paid off by the time you retired? Suppose also that you were in the last stages of paying off the $80,000 mortgage you had taken out years earlier? (It would have been about $80,000 because your income would have been smaller when you borrowed the money.)

That's another $480 a month, $5,760 a year.

Total debt service to be eliminated by retirement date: $12,160. That cuts the $36,804 income need by a third. It cuts your nest egg requirement by a whopping $304,000.

And the reduction doesn't end there. Consumer credit interest payments aren't tax deductible. Most people who are down to the tag ends of their home mortgages discover there is no tax benefit for the interest they pay. Their itemized deductions are less than the standard deduction.

Result: even less income that needs to be replaced. You're not paying taxes on $12,160 of debt service. At a 10 to 15 percent tax rate, this cuts another $1,450 to $2,150   a year off replacement income. That calculates to another $36,000 to $53,750 off the nest egg requirement.

There is a very positive message here. Millions of Americans regularly feel hopeless about retirement saving because they are overwhelmed by debt service. A simple pre-retirement debt reduction plan can work near miracles.

On the web: Earlier columns about the Georgia State Retirement Income Study

Sunday, June 13, 2004: GET TITLE URL on

April 30, 2002: Riley's Life Is Cheaper for Retirees

February 18, 2003: Don't Get Caught in the Early Retirement Tax Trap

February 22, 2004: Singled Out of Benefits