Are you saving too much for retirement?

The conventional retirement planning wisdom may overstate how much Americans need to save by as much as 20 percent, according to a new research report by Morningstar Investments.

Evaluating both the common retirement planning assumptions that are built into many web-based retirement calculators and real spending experience as reported in government data, the investment research firm found that common rule-of-thumb estimates could cause higher-income Americans to sacrifice mightily in their working years only to end up saving significantly more than they need for retirement.

“There are three common assumptions that many software tools and financial advisors use to come up with a retirement savings goal,” said David Blanchett, head of retirement research for Morningstar Investment Management. “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.”

Unfortunately, this optimistic assessment doesn’t apply to all. The long-standing warnings about not saving enough may still apply to lower-income individuals who save less aggressively. These individuals may need to spend as much as 87 percent of their pre-retirement income each year.

It’s the prodigious savers in the higher-income categories that are likely to have far more than they need, according to the study. That’s probably because lower-income retirees are spending more of their budget on necessities, such as food and housing.

Still, the assumption that retirement expenses are going to increase with inflation turns out to be dead wrong, according to Morningstar. Retirees of all stripes – rich and poor – usually find that their expenses rise far more slowly than inflation in the early years of retirement. However, retiree expenses tick up toward the end of their lives, when medical costs are likely to be playing a role, according to the study.

Nonetheless, how much any given retiree will need varies dramatically based on their own personal circumstances and lifestyle, the study noted. Ironically, those who are the biggest savers during their working years are likely to need the least money in retirement, partly because they’ve become accustomed to spending significantly less than their income in order to save.

To do an accurate assessment of what percentage of pre-retirement income any individual might need to replace in retirement, there’s no substitute for sitting down with a pencil and pad and going through your personal circumstances, Blanchett said. Subtract out the expenses you won’t have, like savings and payroll taxes. Then go line by line through your budget to estimate which expenses are likely to rise and which to fall. 

For instance, along with not having to spend on work clothes and transportation, retirees typically spend 5 percent to 17 percent less annually on food because they eat out less and have more time to clip coupons and bargain hunt. Those who will have paid off their mortgage by retirement will see a significant dip in housing costs, but will still have to account for home repairs, property taxes and insurance. Renters, on the other hand, are likely to experience a rise in housing costs over time.