The conventional income replacement method of retirement planning says that retirees need 75 – 85% of their pre-retirement income to live comfortably in retirement. Reality Retirement Planning says that amount is much higher than is really necessary. Ty Bernicke, a Certified Financial Planner for Bernicke & Associates, wrote a convincing article that dispels the 75 – 85% standard.
Here is the executive summary of the article, Reality Retirement Planning: A New Paradigm for an Old Science published in the FPA Journal:
- Traditional retirement planning assumes that a household’s expenditures will increase a certain amount each year throughout retirement. Yet data from the U.S. Bureau of Labor’s Consumer Expenditure Survey’show that household expenditures actually decline as retirees age. Consequently, under traditional retirement planning, consumers tend to oversave for retirement, underspend in their early years of retirement, or postpone retirement.
- “Reality” retirement planning assumes that a household’s real spending will decrease incrementally throughout retirement. The result is that clients can make more realistic retirement saving assumptions and will be able to retire sooner.
- The paper analyzes the Consumer Expenditure Survey data to determine whether people are spending less voluntarily as they age or out of financial necessity or generational differences. The conclusion is that reduced spending is voluntary.
- Using Monte Carlo simulation, the paper runs hypothetical retirement income projections comparing traditional retirement planning and reality retirement planning. Under the traditional approach, the couple’s nest egg would appear to be depleted by age 80. Under the reality approach, the nest egg at age 80 would be over $2 million.
- Such dramatic differences not only have implications for retirement planning, but for related issues such as estate, tax, and investment planning.
Even though the data in this article is from 2002 – 2004, the current data from the Bureau of Labor Statistics basically shows the same results. I encourage you to read this article since it can change your concept of what you really need to save for retirement.
Then come back to this website to see the most current retirement living expenses information from the Bureau of Labor Statistics.