80% Redux

"The same conclusion may be reached from a different premise."

- James Henry Ferguson, The Philosophy of Things

The Journal of Financial Planning has just published an article by Ibbotson which discusses savings guidelines and capital needs for retirement. Although it is certainly not light reading, the article is well written and definitely contains some interesting information. What fascinated me most is that the authors arrived at nearly the same numbers that I did through entirely different means.

• Retirement needs. The article suggested using 80% of "pre-retirement net income", which was defined as gross income less retirement savings. In a previous post, I explained why I don't think I'll need 80% of my pre-retirement income, and I suggested that retirement needs should simply reflect consumption level at retirement. However, I must admit that when I calculate my expected needs based on the Ibbotson formula, it does come out very close to my original calculations based on consumption.
  
• Savings guidelines. The article used Monte Carlo simulations to estimate the required savings rate one would need to build enough capital to provide for retirement needs. Interestingly enough, the article came very close to the personal savings rate I eventually chose mainly through intuition as I watched my net worth grow.
  
• Social Security. The article also discusses the non-linearity of Social Security benefits, which are skewed toward lower-income individuals. The article advises higher-income individuals to save at higher rates in order to compensate for this effect. This is not unreasonable advice. However, I also mention in a previous post about early retirement and Social Security that non-linearity and other aspects of the Social Security benefit formulas mean that higher-income individuals do not lose as much when considering early retirement.