By Richard Quinn
Too many people overestimate or underestimate their retirement needs
I spend a lot of time reading the views of people who are planning to retire or have already retired. My frequent reaction: What are they thinking?
When I watch discussions about retirement planning on social media and elsewhere, I often find that participants show little understanding of how to proceed or even what some basic terms mean. Here’s a sampling of the confusion and uncertainty I’m encountering:
Perhaps the confusion is not surprising. You can find financial experts who will answer these questions in completely different ways. My biggest concern: I see too many people who either overestimate or underestimate their retirement needs, or whose view of the future is either too pessimistic or too optimistic. How’s that for a definitive statement?
Read: Are you saving more than you need for your retirement?
I try to be realistic about retirement – from my admittedly conservative financial point of view. My answers are opinions, though opinions based on decades of managing retirement benefits, running retirement planning programs, and my own 12 years as a retiree. Yet they are opinions. With that caveat in mind, here are my answers to retirement’s thorniest questions:
Replace what? My advice: Aim for 100% replacement of your gross pre-pension income. If you include social security, many people can already count on 40% of their pre-retirement income. If you’re lucky, your employer can help fund some of the remaining 60%.
Economical is not fun. Just getting by in retirement may be the reality for many people, but that shouldn’t be your goal. Do you really want to cut back on your lifestyle? Do you want to live so close to the bot that an unexpected expense could cause financial damage? Aim higher.
Extras. Discretionary spending makes retirement fun, so plan it. Whatever you dream of is a discretion, whether it be traveling, hobbies, dining out, or collecting stuff. Helping your kids is also discretionary.
Forget budgeting. You probably already know what you spend on necessities, how much you save and what your net income is. What is a budget going to tell you that you don’t already know? Make sure you set aside enough money to pay off your credit cards in full each month – no exceptions.
Steady spending. Surveys say that spending decreases later in retirement. I have now been retired for 12 years and our expenses have not decreased. Things – expensive things – keep happening, hence my advice to aim for 100% income replacement.
The impact of inflation. Inflation is a big problem, but its effects vary from person to person. Are you renting? Do you drive a lot? Are you looking to buy a house? Remember, despite the rhetoric, retirees don’t live on a fixed income. If nothing else, Social Security benefits increase with inflation. The 4% withdrawal strategy also assumes annual increases in inflation.
Big money. Health care spending varies widely from retiree to retiree, plus that $300,000 figure typically represents years of Medicare and Medigap premiums. Forecast your property taxes or rent payments for the next 30 years, and you’ll get a huge number for that, too.
Lifespan. The longer you live, the longer you can expect to live. For a 65-year-old man today, the life expectancy is 84 years, while at the age of 75 it is 87. Longevity means more inflation and more time for unexpected things. It’s another good argument for retiring with excess income.
Social Security. Forget the break even point. What do you care? You won’t be around to see if you’ve won the Social Security maximization game. Take your benefits when you need the money most. Remember, there are tax implications and survivor benefits to consider.
Read: When to Apply for Social Security Don’t be fooled by the break-even analysis
Save till you drop. I’m still saving for retirement. Yes, it’s much less than before, but it’s enough to replenish the emergency fund and put something into our grandkids’ 529 plans.
The 4% rule. It’s not a rule, it’s a guideline. Search the literature and you will find that 4% is outdated and it should now be 3.5% or less. Look further and some experts say retirees are selling themselves short and should take more. No one knows with 100% certainty, so I’d stay on the conservative side. If you’re wrong, you can always withdraw more money later.
This column first appeared on Humble Dollar. It was republished with permission.
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