Do people really need to replace 75 percent of their pre-retirement income when they retire?
That question was posed by a financial adviser at the Q-and-A session following a panel discussion at last week's Morningstar Investment Conference.
The panel discussed "Practical solutions for a challenging retirement landscape" and consisted of Christine Fahlund of T. Rowe Price, Maria Bruno of Vanguard and Roger Wohlner of Asset Strategy Consultants. Morningstar's Christine Benz moderated the lively conversation, covering a wide range of topics:
- Is a 4 percent portfolio withdrawal strategy still safe? Consensus opinion: It's a good starting point.
- What role do annuities play in retirement planning? Fahlund likes tax-deferred annuities. Wohlner is not a big fan. Bruno says a single premium immediate annuity might be a solution for someone concerned about longevity.
- Is longevity insurance a good option? Here the tradeoffs were discussed. Wohlner says these products mask the real issue: "Do you have enough saved?"
- What's the best strategy for collecting Social Security? Fahlund says Social Security is governed by 2,700 rules in the handbook, which is why you won't get advice from Social Security employees. But to consider your goals and the various strategies available, check out T. Rowe Price's calculator at troweprice.com/socialsecurity.
The discussion moved quickly from one topic to another, too many to discuss here. But you'll find some of the panelists' nuggets of wisdom in future retirement coverage at Bankrate.
Back to that question
The inquisitive financial adviser who asked the question about retirement income requirements stated that his retired clients require much less than 75 percent of their pre-retirement income. My heart skipped a beat. Really? Is that rule of thumb just propaganda promoted by the financial industry in its quest for assets?
Wohlner affirmed that several of his clients are spending less than that, too.
So I followed up with Wohlner afterward, asking, if 75 percent is not the right number, what is? Is that rule of thumb irrelevant?
The short answer: Not exactly.
Wohlner says, "The best answer that I can give you is that 'it depends,' which is often the answer in a lot of financial planning matters. The percentage of pre-retirement income needed can certainly vary at different times during retirement as well. Some clients might be super active and need 100 percent or more for the early years as they buy all of their 'toys' and this might taper off in later years. Some of this reduction might be offset by higher medical costs down the road as well. Other clients may well spend less than 75 percent, based on their chosen lifestyle or resources."
For its National Retirement Risk Index, the Center for Retirement Research at Boston College uses a target replacement rate that ranges from 65 percent to 85 percent, depending on the specific characteristics of a household. Health care costs are not factored into the equation.
Obviously, it's better to have too much money than not enough. My husband and I figured out that we could live on less than 50 percent of our current income once we pay off the house and cars. We're not in a high tax bracket, either.
"The longer I'm in this profession, the more I realize that rules of thumb can be good estimating tools," says Wohlner. "But actual financial decisions should be dictated by one's unique circumstances."
Workers: What percentage of your income will you need during retirement? Retirees: What percentage of your pre-retirement income are you comfortably living off of now?
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Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.