How much retirement income will you need? Maybe less than you think


The “eighty-percent” rule is a widely quoted rule of thumb for estimating your retirement costs. It says that after you retire you’ll need to have about 80% of your pre-retirement income in order to maintain your standard of living.  This is a “textbook” number that financial advisors often use when advising clients about preparing for retirement, such as how much to contribute to their retirement plans. But recent studies indicate many retirees are spending much less.

The rule takes into account decreases in costs such as saving for retirement and costs associated with working and commuting to and from work. But it assumes that many other costs will remain unchanged.

Some financial advisors go even farther. Well-known personal finance consultant Suze Orman insists that your costs will increase after retirement. “Most likely you will spend more when you’re retired,” Orman said. “The older you get the more [medications] you’ll likely need.” Besides healthcare costs, she says you need to factor in costs of travel, hobbies, and social activities that many retirees engage in.

Many people who are concerned about whether they have enough money to retire start to sweat when they see numbers like this. A Government Accountability Office survey found more than half of Americans age 55 or older have no retirement savings. Repeated surveys show that the majority of Americans are concerned about having enough savings to last through retirement.

But for many soon-to-be retirees who are facing a shortfall, there is good news: studies have found that most retirees’ costs tend to decrease significantly. There is a recent and growing body of literature exploring the spending habits and tendencies of retiree households. The majority of the studies note that consumption tends to decline starting at retirement and continues to decline. Overall, these studies find, the real change in annual spending through retirement is clearly negative.

Several research studies have found that the vast majority of retirees’ expenses actually did not increase. Instead, most retirees’ expenses declined after retirement, before ramping up somewhat in old age for healthcare costs. While the traditional rules say you will need 75 to 80 percent of your pre-retirement income, a Morningstar working paper found that many retirees need 20 percent less than these estimates, or closer to 60 percent of income.

This finding may have significant implications for your retirement plans. For example, consider a 65-year-old worker with a $50,000 salary. After retirement, this person would need 75 percent of their salary, or $37,500 per year. If they received the average Social Security benefit of $1,291 per month, they would need to make up $22,008 from their savings. This means they would need $550,200 in savings, assuming a 4% annual withdrawal rate. But if they only needed to replace 60 percent of their income, or $30,000 per year, they’d need $362,700 in savings, which is 50 percent less.

So it’s useful to hear about others’ experiences when making planning for retirement. Of course, there’s a big risk in making blanket statements regarding retirement finances. Retirement costs, just like retirement itself, are highly personal: depending on your retirement activities and lifestyle you might need more, less, or the same income as you had while working. Morningstar found that the actual retirement income needed ranged from 54% to 87% of pre-retirement income. Overestimating your retirement costs might cause you to save more than you need, and there’s nothing wrong with that. But knowing what to expect can help alleviate anxiety and sleepless nights.

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