Personal Finance

Want to be retirement ready? Lower your expectations

How to reduce retirement needs
How to reduce retirement needs

Whether most Americans will have enough saved to retire comfortably has become a matter of great debate. But some may be in better shape than they think.

Most predictions aren't in consumers' favor. In a recent Legg Mason study, only 40 percent of the 458 investors surveyed said they are "very confident" in their ability to retire—perhaps in part because they think they'll need to have at least $2.5 million saved, versus the often-talked-about $1 million. Another recent survey, from TIAA_CREF, found that 46 percent of Americans are worried about running out of money in retirement.

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Still, there are some conflicting reports. A study released Tuesday from the Center for Retirement Research at Boston College looked at whether as many as 35 percent of households, or as few as 12 percent might be falling short, depending on the calculation method. Researchers assessed 2004 data for households in their 50s—folks who would be just about ready to retire now, or have recently done so.

There's a catch. That rosier 12 percent relies on two big assumptions: Households will spend less when their children leave home, and household spending will decline in retirement. "If households accept declining consumption in retirement, they need less wealth to maintain their living standard," according to the paper. "If households consume less once their kids leave home, they have a more modest target to replace and they save more between the emptying of the nest and retirement."

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Without those assumptions, researchers wrote, risks are likely to be more in line with the National Retirement Risk Index, which estimated that 35 percent of households in that age group were at risk of not saving enough. That's the more likely outcome, said Anthony Webb, one of the co-authors and the center's senior research economist. "The kids leave home and the parents live it up," he said. That means households (a) aren't diverting those cost savings for retirement and (b) have a much higher cost of living at the time they retire.

"Unless they're very, very well on track with their savings, they're probably not going to be able to maintain their standard of living in retirement," Webb said.

It is possible—though not certain—people can spend less in retirement, said certified financial planner Becky Krieger, senior director for wealth management teams at Accredited Investors in Edina, Minn. You won't be paying for disability insurance, having FICA taxes taken out of a paycheck or setting aside savings for retirement, for example. Some retirees also plan to have paid off the mortgage and zeroed out other debt before leaving the workforce. "Your income tax situation may be very different," she said.

But that drop in fixed expenses is often offset by an increase in discretionary ones like vacations, shopping and dining out. "People are not retiring and living sedentary lives anymore," said Krieger.

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There can also be a rise in costs—namely, health care, said Victoria Fillet, a certified financial planner and the founder of Blueprint Financial Planning in Hoboken, N.J. In 2012, the Employee Benefit Research Institute estimated that a 65-year-old man would need at least $70,000 in savings, and a woman of that age, $93,000, to have even a 50 percent chance of having enough saved to cover health care expenses in retirement.

The second assumption that consumers can reduce spending once kids are grown is another gray area. "That's evolved in the past decade as you see families supporting their children longer," said Krieger. More than one-third of baby boomers are providing financial support to their children or others, according to new data from Hearts & Wallets.

"If you don't have boomerang kids … then they start having grandchildren," said Fillet. Being a grandparent generates costs, too, she said, from travel for visits to discretionary spoiling, whether that takes the form of gifts and vacations or college savings contributions. "You can't control the desire to do things for them," she said.