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How much should you be saving for retirement? The answer is sufficiently complicated that it’s causing debate in financial planning circles. The majority position is that most Americans need to save far more aggressively for retirement, lest they wind up dependent on Social Security. Yet one new study suggests that people, by and large, are saving enough. And another economist says that if people follow common online retirement planners, they may be saving far more than is necessary. On some level, of course, the answer to how much to save depends on what you want from life. How much spending do you need to be happy? And how long do you want to work at a high-income job? Answer these questions, and the right savings rate is much easier to calculate. Yet despite this individual aspect to the question, I’ll offer as an answer that I think fits well for many lawyers in large firms: Reach financial independence as quickly as possible, then do whatever you want, whether it’s buying a ski lodge in Aspen or joining the Peace Corps. SAVING ENOUGH? Plenty of evidence indicates that many Americans are not saving enough. According to the Commerce Department’s Bureau of Economic Analysis, the national personal savings rate in January (that is, disposable personal income minus personal outlays) was a negative 1.2 percent. This statistic went negative for the first time this millennium in the second quarter of 2005 and has remained there ever since. Clearly, many people are spending more than they earn, and then they’re financing those outlays by borrowing or dipping into past savings. The consequences of years of inadequate savings can be seen in the amount of retirement assets that families have accumulated. According to a 2005 Labor Department report, the average household has about $50,000 in retirement accounts. (There are wide variations in the amount saved, of course, and wealthy households — just imagine Bill Gates, George Lucas, or Oprah Winfrey — can pull up an average considerably.) The median amount is $2,000. With these low savings rates, it is not surprising that many retirees depend on Social Security. According to the Social Security Administration, 41 percent of the income for all of the elderly comes from Social Security. Two-thirds of Social Security recipients rely on the program for half or more of their income. For about one-third of recipients, Social Security provides more than 90 percent of their income. And remember: The average monthly Social Security payment for retirees in December was $1,044. That’s about $12,500 a year — probably not what most of you would consider a good retirement. That said, some economists suggest that Americans may not be doing too badly. One study in particular — by economists John Scholz and Ananth Seshadri of the University of Wisconsin-Madison and Surachai Khitatrakun of the Urban Institute — raised questions. The study used complex mathematical equations (I’m really not talking basic arithmetic here) to calculate an optimal savings decision. It then compared that theoretical number to the actual savings of a sample of Americans ages 51 to 61 in 1992. The authors found that 80 percent of these households had accumulated “more wealth than their optimal targets.” For those not meeting their targets, the shortfall was “typically small.” For example, they calculated that for all households, the median optimal wealth target was $63,000 (excluding Social Security and pensions), and only about 15 percent fell below this. The data used were from the early 1990s, potentially somewhat dated by this point, though the authors note that the data were gathered before the exceptionally strong stock-market performance of the 1990s (which might have left people in an even better retirement situation). Another economist, Laurence Kotlikoff of Boston University, contends that estimates from conventional online retirement planners, such as those available on mutual-fund companies’ Web sites, can lead to dramatic oversavings. He puts that oversavings at 36 percent to 78 percent. Kotlikoff argues that, instead of concentrating on spending targets in retirement (such as trying to replace 70 percent of current spending), retirement software should focus on “consumption smoothing” to maintain a stable living standard over time. He reasons that if current spending is unsustainably high, retirement targets will be set too high, and conventional planning programs will tell households to save more than is consistent with consumption smoothing. (Kotlikoff sells his own software program, ESPlanner, which supposedly remedies these deficiencies in other calculators.) THE FIRE PLAN So how much should you be socking away? One way to figure needed savings is to use a financial calculator, either a traditional one with retirement spending targets or a newer one such as Kotlikoff’s. Another solution is to rely on a traditional rule of thumb: For example, save at least 10 percent of your salary. This isn’t the most sophisticated way to plan, but it’s better than spending more than you earn. If you follow either of these approaches and it leads you to save more than you were saving otherwise, it probably wouldn’t be a bad thing. But I think there is wisdom in a third approach that integrates your retirement planning into a vision of what you actually want from your life. Aristotle suggested that the purpose of work is to obtain leisure. Not everyone agrees. Work can provide intellectual and social benefits past the point of economic necessity. Yet achieving financial independence — that is, not having to work anymore — is a key measure of financial success. Within the financial planning community, this happy condition of financial freedom is sometimes dubbed FIRE, an acronym for “financially independent/retired early.” To reach it, you must accumulate about 25 times your total annual living expenses. My version of the FIRE plan goes like this: Accumulate 25 times your needed yearly expenses as quickly as you can. (You may want to save separately for certain one-time expenses such children’s college education.) And then do whatever you want in life, whether it’s still practicing law and buying a yacht, switching over to lower-paid but more enjoyable work, or even retiring at age 35. This entails front-loading your savings, as opposed to waiting until you make partner. (Or equity partner. Or equity partner with a million-dollar annual draw. Or . . . well, the reasons for delay can be legion.) Such saving may entail some foregone luxuries along the way, but it can also be very prudent given the burnout factor in big-firm practice. Yes, you may yearn to spend 40 years of your life parsing the Code of Federal Regulations or engaging in vigorous motions practice. But it would be nice to have the option to slow down if you develop ulcers, lose your taste for the Federal Register, or want to see your family by the light of day. And financial security is valuable even if you love your current job. With enough money in your retirement accounts, you can heed the words of an anonymous sage: “So live that you can look any man in the eye and tell him to go to hell.” Save your money, and the choice will be yours.
Robert L. Rogers, associate opinion editor at Legal Times , writes the Legal Tender column on personal finance. E-mail Rob with comments or suggestions for future columns.

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