For many years, financial advisors and financial publications would use the oversimplified rule-of-thumb that one should target 80 percent of their pre-retirement income when they retire. While that guideline served a purpose for some, for most people it gave a false sense of security. It misled rather than helped.
According to the Employee Benefit Research Institute, over half of retirees that were surveyed spent 95 percent or more of their pre-retirement income during retirement. This makes sense today. Retirees have grown used to more technology which carries added costs. Many retirees are traveling more, often for volunteer missions work. More retirees today find they are spending more to help their children and grandchildren. On and on one could go with examples of added spending. The essential point is that most of today’s retirees will find their expenses are much higher in retirement than anticipated.
Some of those expenses will decrease over time as one has diminished activity and purchases as they age. At the same time, inflation will continue to add to basic costs. And the big area of concern today is the radically increasing costs for health care.
The 80 percent rules-of-thumb can be useful for some. But for others it can lead to poverty. The better option is to put together a budget based on your situation and goals. Then add reasonable inflation factors and potential costs for increased health care. This will help establish a goal, realizing that many factors make such a projected budget unpredictable.
This estimate will be better than the 80 percent rule-of-thumb but even that will likely fall short of what your actual retirement spending will be. Your spending will vary depending on your actual retirement age, your interests, where you live, and other lifestyle issues.
Once you’ve established a projected goal, the next step is to determine how much you need to save in order to reach the goal. That’s a topic for another day!