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Doing retirement income math

By Jennie L. Phipps · Bankrate.com
Monday, June 10, 2013
Posted: 5 pm ET

How much pre-retirement income do you really need to replace when you retire?

A new retirement planning study by Bankrate.com-owned site Interest.com shows that while conventional retirement wisdom says that it's vital to replace 70 percent to 80 percent or even more of pre-retirement household income, most Americans aren't able to do that.

On average, Americans 65 and older are only able to replace 57 percent of the average household income of 45- to 64-year-olds. Nevada and Hawaii are the only states where people older than 65 earn at least 70 percent of the income of younger adults. In New Jersey, Rhode Island, North Dakota and Massachusetts, older people are able to replace less than 50 percent of income.

Does this mean many of us are going to be eating kibble in our declining years? You have to decide for yourself, but another study on the same subject might offer some guidance.

In 2012, a study by the Employee Benefit Research Institute, or EBRI, determined that the longer you live, the less you spend. The study concluded that beginning at age 65, household expenditures fall 19 percent by age 75, 34 percent by age 85 and 52 percent by age 95.

Health is the key factor, EBRI suggests. Between ages 50 and 64, people spent an average of 9 percent of their budgets on health care. By age 75, health care is the second-largest item in most people's budgets. Housing is first. And by age 85, most people are spending 18 percent of their budgets on health-related items. Meanwhile, expenditures for clothing, transportation and entertainment are falling like a rock.

One factor that made a huge difference was having long-term care insurance. Retired households with long-term care insurance were able to spend 10 percent more than households without it, regardless of income levels.

That's another good reason to figure out a long-term care strategy before you face the problem.

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