Liz Weston, Published August 05 2013
Money Talk: How much do I really need for retirement?
A: The further you are from retirement, the harder it can be to predict how much you’ll need.
Financial planners often use an income replacement rate of 70 percent to 80 percent as a starting point. It’s just that, though. Planners will tell you some of their clients’ spending actually increases in the early years of retirement as they travel and indulge in other expensive hobbies. Those who are frugal or used to living well below their means are often able to retire comfortably with a much lower income replacement rate.
A big wild card is the cost of medical and nursing care in your later years. The U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey shows average overall spending tends to drop after retirement and continues to decline as people age. Serious illness or a nursing home bill can cause spending to surge late in life, however, leading to a U-shaped spending pattern for many.
Taxes also are hard to predict. While most people drop into a lower tax bracket once they stop working, those with substantial retirement incomes and investments may not. Tax rates themselves could rise in the future, even if your income doesn’t.
Social Security benefits may change, as well. Although it’s highly unlikely the program will disappear, some proposals for changing Social Security reduce checks for higher earners.
Once you’re within a decade or so of retirement, you should have a better handle on what you’ll spend once you quit work. Before that point, err on the side of caution. Assuming a higher income replacement rate gives you wiggle room once you’ve retired – or the option to retire earlier if it turns out you need less.
Liz Weston is the author of the new book “Deal with Your Debt.” Questions may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or by using the “Contact” form at asklizweston.com.