March 2009 Archives

March 23, 2009

Post-Retirement Income (Part 3): How Much Income Will You Need to Replace?

In the previous two entries I have explored a number of reasons why the conventional advice that you'll need about 80% of your pre-retirement income to maintain your lifestyle post-retirement is just plain wrong, and that 50% to 60% is usually closer to reality.

But there is another huge and crucial factor that means you'll spend far less than you probably imagine. In a word, it's AGE. 85-year-olds almost always spend far less than 65-year-olds, something that all by itself vitiates the retirement calculators that predict you'll need to replace 80% of your income until the day you die.

Think of it this way: How much clothing, travel, entertainment, consumer electronics, furniture, vehicles and other gee gaws of modern life does your average 85-year-old consume? Typically, a fairly modest amount -- and almost always far less than the same person consumed at 65. What about medical care? Even here, the combination of Medicare and decent Medigap insurance means that costs should be fairly steady over the years.

Indeed, I know a number of reasonably frugal (but not self-denying) 80-year-olds who spend very little beyond taxes and maintenance on a house or condo, utility bills, groceries, and fuel for a decent car that they, don't drive that much anyway. In addition, some of these people spend significant money helping younger family members, but this, of course, is a discretionary expense. 

But what about the possibility of needing big bucks for expensive long-term care? I'll deal with this in detail in a future blog (or you can take a look at the entensive treatment in my book Get a Life: You Don't Need a Million to Retire Well (Nolo)), but, statistically at least, this is far less of a potential financial tsunami than you might imagine. Among the several big reasons for this is that, at least for people who are partnered, the first mate to die rarely spends much time in a care facility, preferring to remain at home as long as possible. And assuming the second partner (or a single person) does need extended care, any house or condo they own is usually sold, providing a source of needed funds.
March 20, 2009

Post-Retirement Income (Part 2): Finding Your Figure

Okay, as discussed in Part 1 of this series, if the 80% rule is nonsense, how can you arrive at a reliable dollar figure for the amount of current income you'll need to replace after retirement?

Start with what you know rather than guesstimates about the future, which, like most fantasies, are unlikely to have much of a relationship to reality anyway. Ask yourself: How is my financial health today? If you're currently living within your income and possibly saving a little to boot, you have a good start for estimating how much income you'll need to maintain a similar lifestyle after retirement.

Now it's time to subtract the current expenses that will diminish or disappear later. In Part 1 of this exercise, I pointed out that for many people who no longer need to pay a mortgage or bear the costs of raising children, they'll enjoy the largest post-retirement savings, together often netting at least 40% -- and often more.

And, unless you're a shopaholic for whom more free time necessarily means more spending, there are a whole host of other possible savings. The most obvious are related to the job you no longer need to perform -- for many people, the top of the list is the cost of commuting, followed by work-related clothing and food. For example, a woman who drives 20 miles to work, maintains a wardrobe of business-appropriate clothes, and buys lunch and coffee now and then can easily save five thousand dollars per year simply by staying home!

Many other potential post-retirement savings fit into what I call the "time is money" category. The equation is simple: The more free time you have, the easier it is to maintain an equivalent lifestyle at a lower cost. For example, instead of patronizing the pricey but convenient corner store, you'll have plenty of time for a once-weekly trip to Costco. And when it comes to taking a vacation, you'll now be able to travel at off-peak times, taking advantage of significant savings in transportation and lodging.

But what about the so-called retirement experts who, to quote the Associated Press reporter Dave Carpenter in his recent article "Retirement: Test Your Financial Planning IQ", say that "people tend to spend more money when they have more time." Perhaps, if we remember that these are the same retirement experts, for the most part, who recommended buying mutual funds when the DOW was over 13,000, we can put their "you can never save enough" advice into perspective.

Finally, don't forget the savings you'll achieve by taking advantage of senior discounts. For example, an excellent public golf course near me lets seniors play as much as they want on weekdays for $80 per month. And the local rapid transit systems discount senior fares by up to 70%. And then, of course, there are America's national parks which offer free admission to those over 60.

But what about medical costs and other things that may be more costly after you retire? Medicare will cover most of these costs, but especially if you have or develop a chronic illness, you'll be out of pocket some cash, either by paying for a medi-gap insurance policy or directly for uncovered fees and drugs. If you are reasonably healthy and do the kinds of things necessary to stay that way, you might sensibly guess that adding back a few thousand dollars per year makes sense. And, for anyone who feels the need to be more precise, I recommend Social Security, Medicare & Government Pensions, by Joseph Matthews (Nolo), which will provide the tools you need to make a far more accurate estimate.

In Part 3 of this series, I'll discuss the final big piece of your retirement spending conundrum: how your spending patterns will change as you age.
March 9, 2009

Post-Retirement Income (Part 1): What Percentage of Pre-Retirement Income Will You Need?

Articles in the daily press, commentaries by financial planners, and "retirement kits" published by mutual fund and insurance companies all tell us that to live comfortably after retirement we will need a big annual income for at least 30 years. For example, a recent Associated Press article by Dave Carpenter quotes an AON consulting report stating that most employees will need an average of 77 to 94 percent of their pre-retirement income to maintain their lifestyle. No surprise there, as most insurance and investment outfits who want to sell us their products use 80% as the amount of income that must be replaced.

Since many of us have no hope of ever saving the megabucks needed to produce this yearly cornucopia, the main effect of these messages is to make us anxious. Fortunately, these "you'll need at least $1,000,000 to retire happily" articles more accurately reflect the biases of the investment industry than they do the spending patterns of real retirees. As a result, they greatly exaggerate the amount you'll really need to spend post-retirement.

Start figuring out how much you'll really need to spend after retirement by understanding that retirement planning is best done with a dash of black humor. That's because, no matter what the investment industry claims, it's impossible to predict with anything approaching accuracy how much you or anyone else really needs to save. For example, unless you are currently in the last stages of a terminal illness or plan to poison yourself next Friday, you can't know how long you will live or how healthy your mind and body will be in your retirement years, both essential facts to accurately determine how much money you'll need.

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