A comprehensive retirement plan will have a mix of employer benefits, government plans, and retirement savings accounts. There are also many "rules of thumb" that prescribe how much income is needed once retired. From a practical standpoint, retirement income needs to last a lifetime, which might be longer than most people think.
In this article, we're going to first start out by talking a little bit about life expectancy, and separate some of the fact from fiction. Next, we'll talk about retirement income, in depth, including how to go about calculating how much money is needed. We'll also talk about ways to project retirement fund balances. Then we'll finish up with some tips on how to make retirement income last a very long time.
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There is a very good reason "rules of thumb" are used when planning for retirement: because life expectancy is unique to individuals. Some people will reach their twilight years in excellent physical condition, while others will develop diseases that will rob them of their full complement of retirement years.
When life expectancy values are quoted in the news, the age they're often talking about is life expectancy at birth. For example, a female's life expectancy is 80.0 years of age while a male's life expectancy is 74.7 years (at birth). But anyone lucky enough to reach retirement age will have a very different projected life expectancy.
Everyone planning for retirement needs to be aware of their life expectancy as they're approaching those retirement years. The following two tables demonstrate this point:
| Male | Female | |||
| Age | Black | White | Black | White |
| 50 | 24.7 | 28.7 | 29.8 | 32.5 |
| 55 | 21.1 | 24.5 | 25.7 | 28.0 |
| 60 | 17.8 | 20.5 | 21.9 | 23.7 |
| 65 | 14.8 | 16.8 | 18.3 | 19.7 |
| 70 | 12.0 | 13.4 | 15.0 | 15.9 |
| 75 | 9.6 | 10.4 | 12.1 | 12.5 |
| Male | Female | |||
| Age | Black | White | Black | White |
| 50 | 74.7 | 78.7 | 79.8 | 82.5 |
| 55 | 76.1 | 79.5 | 80.7 | 83.0 |
| 60 | 77.8 | 80.5 | 81.9 | 83.7 |
| 65 | 79.8 | 81.8 | 83.3 | 84.7 |
| 70 | 82.0 | 83.4 | 85.0 | 85.9 |
| 75 | 84.6 | 85.4 | 87.1 | 87.5 |
Source: National Vital Statistics Reports, Vol. 54, No. 14, April 19, 2006 US Department of Health and Human Services.
The above tables can be used by anyone thinking about retiring young, in their 50s, or by anyone considering retiring later in life. The way to use these tables is demonstrated in the following example.
Tom is a 50-year-old white male thinking about his retirement needs. Given his age, gender, and race he can expect to live for another 28.7 years. That means his life expectancy is around the age of 79.
Another way to use this table is demonstrated by this second example. Let's say Jennifer is a black female that expects to retire at age 65. At that point in her life, she can expect to live for another 18.3 years or roughly to age 83.
We're going to revisit these tables later on, as we expand our example to include lifetime retirement income calculations.
Now that we have a better understanding of life expectancy, it's time to talk a little bit about retirement income needs. The most common rule-of-thumb is the generalization:
In retirement, you'll need to replace 70 to 80% of your pre-retirement income.
This rule-of-thumb is based on the hypothesis that most retirees will not have the same level of financial obligations in retirement, and for many Americans that's true.
Most retirees don't have to worry about paying for college or weddings; two pretty expensive life events. In addition, people entering their retirement years have worked hard to pay off their mortgage. Finally, when someone is retired they're no longer putting money away each year for retirement.
These are some pretty compelling arguments that suggest retirement income can be lower than pre-retirement income levels without lowering a standard of living. Perhaps the rule-of-thumb mentioned above is a better guide than most planners think, and using it can be helpful in predicting future income needs.
Anyone that doesn't think the above rule-of-thumb is going to apply to their situation will have to go through a series of fairly detailed calculations to figure out an exact replacement amount. The most logical way to go about this is by building a household budget. Individuals deciding to go this route also need to remember that inflation is going to result in decreased buying power in the future. That means it's important to make some pretty accurate educated guesses, including answers to the following questions:
Anyone interested in running through some quick retirement scenarios, can choose from several of our online retirement calculators. The calculators tailor-made for this particular topic include:
As promised, we're going to finish this topic up by providing tips that can help to make retirement income last a lifetime.
The most effective way to save for retirement is starting early. Adopting this strategy allows individuals to maximize the benefit of compounding interest, and makes saving for retirement far less financially demanding.
There's a saying "You've got to have a dream to make a dream come true." The same holds true for retirement planning, it's important to have a plan to make that plan come true.
While some might find this last tip unappealing, it certainly is a very good way to make retirement funds last longer. By delaying retirement, there is more time to save, less time savings is needed, and a higher monthly Social Security benefit is possible too. It's also arguably the most effective way to make your retirement income last a lifetime.
It's certainly good news that Americans are living longer, but that fact makes it even more imperative that people create plans that will provide enough retirement income to supply the quality of life everyone deserves.
About the Author - Calculating Retirement Income Needs
