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.
Lifetime Retirement Income
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.
Life Expectancy at Retirement
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:
Life Expectancy (Years)
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 |
Life Expectancy (Age)
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.
Life Expectancy Examples
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.
Retirement Income
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.
Income Considerations
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:
What will be the rates of return on investments?
How much money is held in pre-tax retirement accounts such as Traditional IRAs?
How much money is held in non-taxable retirement accounts such as 403(b) and 401(k) plans?
What tax rates or brackets will exist in the future?
Will Social Security be available?
Is there a pension that can be used to supplement retirement income derived from savings?
Online Retirement Calculators
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:
Retirement Income Calculator: allows the end user to enter their current age, planned retirement age, life expectancy, money in retirement accounts, and desired retirement income. The output from this calculator includes funds at retirement, and whether or not there is a funding surplus or shortfall.
Retirement Savings Calculator: in addition to the features of the above calculator, this online tool accommodates pension and Social Security assumptions.
Making Retirement Income Last a Lifetime
As promised, we're going to finish this topic up by providing tips that can help to make retirement income last a lifetime.
Tip #1: Start Saving Early
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.
Tip #2: Create a Retirement Plan
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.
Tip #3: Delay Retiring
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
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