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Figuring your spend-down rate

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"A dynamic process"
The financial industry has met the accusations with a mixture of patience and bewilderment. After all, how can anyone question how much Americans are saving when all indications are that Americans are not saving nearly enough to carry them down the back nine?

Fran Kinniry, principal of Vanguard's investment counseling and research group, says the naysayers are ignoring some inconvenient truths.

"We've done quite a few research situations on this. Most of their assumptions underestimate the historical volatility of markets. If you want to use average rates of return for markets, then potentially the calculators are too high, but if you typically think about markets being cyclical, it's very difficult to say that investors are saving too much," he says.

Think of it as a game of musical chairs: if the markets are with you in retirement, you get to keep your chair; if they should cycle downward however, you may lose it. Literally.

In fact, Chad Peterson, spokesperson for TIAA-CREF, says traditional targets may be a little low.

"Extensive research and empirical evidence gained through our nearly 90 years of helping millions build financial security in retirement suggest people should aim to replace approximately 80 percent of their pre-retirement income when they stop working. Some experts believe that this 80 percent replacement estimate may even be on the low side, given the potentially higher costs of medical and long-term nursing care projected for the future and increased individual longevity," he says.

Jenny Engle, spokesperson for Fidelity Investments, says that while Fidelity's online tools default to an 85 percent pre-retirement income savings rate, the key is to keep using them to adjust both pre-retirement savings and post-retirement spending.

"We've taken what we believe is a realistic, if somewhat conservative, approach to building our tools," she says. "These tools help them really develop quite a robust income plan; they can modify it, use different scenarios and alter the withdrawal rate that they might consider using based on their budget and the type of lifestyle they want to live. This is really a dynamic process."

Engle says a little controversy in the staid retirement planning industry might be a good thing.

"Our research shows very clearly that the majority of people are not saving enough for retirement," she says. "We think it's a healthy discussion and the more people are thinking about this and focused on it, the better off people will be and the more prepared for retirement they're likely to be."

But Kinnery cautions against the temptation to shortchange your nest egg.

"The number one way we think about it is to ask one simple question: What are the consequences of over-saving verses under-saving? I would argue to save as much as you can while you are young, and if you experience good markets, you can always cut back (saving) when you're still in the work force later, when you're 50 or 55. But it's so much harder to play catch-up later because you lose the compounding impact, that it's clear to us that the consequences of over-saving verses under-saving are not even on the same plane."

Next: "Nobody is advising against saving."
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