Mar 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.