How many times have Americans been told we’re not saving enough for retirement? That we’re going to outlive our savings? So many times that some of us have grown used to the idea that we’ll never stop working.

But new research from Morningstar published this week finds that our retirement prospects aren’t as bleak as those countless surveys say.

David Blanchett, head of retirement research for Morningstar Investment Management, tested three assumptions financial advisors and retirement calculators use to come up with a retirement goal — often thought of as our magical “retirement number.” He found that they often rely on a generic formula that could lead some workers to oversave for their golden years by as much as 20%.

“There are three common assumptions that many software tools and financial advisors use to come up with a retirement savings goal—a 70% or 80% replacement rate based on pre-retirement income, an income need that rises with inflation, and a 30-year retirement time horizon,” Blanchett says. “When we looked at actual retiree spending patterns and life expectancy, however, we find that these assumptions don’t hold true for many people and, on average, can significantly overestimate how much people will actually need to fund their retirement.”

The 80% rule

The  80% replacement rule — which means workers should aim to replace that much of their pre-retirement income —  is hardly a one-size fit-all model. Blanchett argues that the figure may be much lower for some workers, considering that some expenses, like taxes for Social Security and Medicare, work-associated costs like commuting, and pre- and post-tax retirement savings contributions all but disappear once you retire.  On the flipside, it could wind up being higher for other workers, especially if they live in a state with a high income tax or expect to put their grandchildren through college.

When Blanchett looked at four households earning between $37,500 and $225,000 a year, and factored in what they would need to have once they were no longer paying for these expenses in retirement, he found their ideal replacement rates varied widely — as low as 54% and as high as 87%.

“Although a rule of thumb replacement rate of 70% to 80% is clearly reasonable, it isn’t ideal, and moreover, it is clear that the replacement rate is sensitive to the proportion of pre-tax expenses and post-tax expenses,” he says.

The point is to be sure your ideal replacement rate is calculated in the most personalized way possible. If you’re using a retirement calculator, make sure it takes into account those expenses you’ll no longer incur once you stop working and any significant expenses you could wind up paying for down the line. A good financial advisor will ask you these questions as well.

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Spending vs. inflation

There’s also the widely-held assumption that annual retirement spending keeps pace with inflation, both increasing at around 3% to 4% a year. But when Blanchett looked at consumption levels of retirees ages 60 to age 90, he found their spending rates weren’t as cut and dried, and that for much of retirement, spending rates actually decreased.

People typically spend more in the few years leading up to and after retiring, he found, likely as they boost savings contributions ahead of leaving the workforce and then start to spend heavily, either on travel or moving expenses. But then spending tends to decline through the middle of retirement by as much as 2% until picking back up toward the end of life, likely due to medical costs.

Blanchett calls this a “retirement spending smile” (graph below), when expenditures actually decrease in real terms for retirees throughout retirement and then increase toward the end. “Overall, however, the real change in annual spending through retirement is clearly negative,” he found.

The Age Factor

Age obviously plays a significant factor for anyone trying to estimate their retirement needs, and Blanchett cautions young workers against taking retirement calculations too literally. It’s not as if you could rely on the same retirement calculation working a $35,000-a-year job after college once you factor in job growth and future expenses like children and a mortgage.

“You’re probably going to get a few raises over your lifetime,” he says. “I would say if you’re 25 years old, these tools are great starting points, but so much is going to change between then and now that it’s all kind of a wash. Save 10% to 15% of your income and see what happens.”

Where calculators can be most beneficial is for workers about 20 years away from retirement, he says.

“These are the individuals who could use a more refined perspective of what they’ll need in retirement,” he says. “It’s not really until you get closer to retirement that you’re saying, ‘hey, this is going to happen, what do I have to do to get there?’”  

The bottom line: Don’t use Blanchett’s study as an excuse to buy a Caribbean cruise with your IRA money. Most Americans aren’t saving enough for retirement, and one of the most common regrets among retirees is that they didn’t sock away more when they were younger and bringing home a steady paycheck.

At the same time, retirement is hands down the largest investment most people will ever make, and it will require a lot more planning than punching a few numbers into a calculator. Think of it like investing in an expensive suit — picking out the right size is the first step. Tailoring it to fit your body’s unique shape is what brings it all together.

“I think it’s always better to have the best estimate in front of you,” says Blanchett. “What you don’t want to do [as a financial advisor] is show someone a number that makes them feel like they can’t achieve it. It’s about being as realistic as possible.”