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"A Goal Without a Plan Is Just a Wish"
-Antoine de Saint-Exupery

   

Get Realistic About Retirement Spending Assumptions

For many years, financial planners had general rules of thumb for determining the amount of income retirees will need, the most popular being the “70 percent rule” which suggests that retirees will need to replace just 70 percent of their pre-retirement income to provide for their living needs in retirement.  That may have been an effective guideline a few decades ago when the rule was established; however, for many retirees, relying upon it today may be the best idea. It’s a very different world today, and old guidelines based on conditions that existed 30 years ago don’t necessarily reflect real costs of aging today which include:

  • A male turning 65 years old today can be expected to live another 19 years versus 11 years in 1970; for women, they can expect to live another 23 years.
  • The chances of retirees or an elder family member requiring some form of long-term care is 7 in 10.
  • Many of today’s retirees are carrying some form of debt into retirement, including mortgages, consumer debt and student loans.
  • Although inflation has moderated somewhat since the 1970s, lifestyle costs, such as housing, food and transportation consume a larger portion of a retiree’s budget today.
  • Although health care cost increases have slowed, the rate of cost increases continues to be well above the general rate of inflation.

For many retirees, the 70 percent income replacement rule might be a good start for planning; however, with the risk of inflation compounded by longevity risk now confronting retirees, income planning should be based on the realities of aging today. It’s not inconceivable that, for some retirees, their income replacement need could be as high as 100 percent.

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