Are You Saving Too Much For Retirement?

July 18, 2008

Author and columnist Scott Burns finds major flaws with the way conventional financial planning sets long-term investment goals.


Many index-minded investors are familiar with Scott Burns from his syndicated newspaper columns and four critically acclaimed books.

But a lot more probably know of him from his classic Couch Potato portfolios. The Burns formula of combining a few broad-based index mutual funds in a straightforward and diversified fashion is so popular that all sorts of lame imitations keep cropping up.

None of the clones has as catchy a title. And none is put together with the sort of understated sophistication that makes modern portfolio theory seem so deceptively simple.

Now Burns is turning his attention to helping families figure out just how much they really need to save to build a sufficient nest egg. In his latest book, "Spend ‘til The End," Burns and economist Laurence Kotlikoff tackle major assumptions in financial planning.

The authors refer to current methods many advisors are using to develop long-range investment goals as "rules of the dumb." As a result, Burns and Kotlikoff assert that households are setting too high of savings targets. And that in turn is creating an environment where too many investors are adopting more risk than necessary into asset allocation plans.

Besides trying to educate investors through his books and columns, Burns serves as chief investment strategist at He co-founded the asset management firm in 2006 after retiring from the Dallas Morning News.

On Thursday, I caught up with Burns for an update on his latest research and views on investment planning. (IU): Are a lot of investors really being too aggressive in their retirement planning?

Scott Burns (Burns): Yes, the conventional rule of thumb is that you've got to replace between 70%-85% of your income for retirement. Every three years, Georgia State University updates that research, which is sponsored by a large insurance company.

IU: The book takes that research apart, doesn't it?

Burns: There are some huge reasons why that 70/85 rule is wrong. Looking at income levels during the last years of your employment [to set savings targets] ignores all of the things that have occurred in your adult life and influenced your consumption patterns. Let's start with debt. A typical household in their 30s, for example, might have commitments of about 25% of its income to debt. If you do nothing in your adult life other than to pay off your debt by retirement, that's 25% of your gross income that you don't have to replace.

IU: So you can subtract 25% off the top from that 70/85 rule?

Burns: Yes, and there's something else which is a major expense that you've got to take into account. It's called children. That reduces the standard of living you have as an adult. Most people very happily accept those decisions to make certain sacrifices. It looks like about 16% of your gross income goes to pay for those types of commitments.

IU: So counting children and general forms of household debt, that cuts about 40% from the conventional savings rates for retirement?

Burns: If you go to my Web site, you can find a column that looks at a couple with a single earner who makes $100,000 a year. I picked that figure for a specific reason. That covers the vast majority of the population of the United States. It uses an economies-of-scale method for figuring out the relative costs of different-sized households. It actually works fairly accurately when people examine their budgets. And this is just one tool of coming up with a figure for how much of your spending is accounted for by children. In this example, the actual spending net of all expenses is about 39% of their income.

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