The takeaway: Boomer, beware the retirement replacement ratio. Contrary to belief, it doesn’t help Boomers figure out how much money they need to retire. The retirement replacement ratio may be fine for early- to mid-career workers, but not for Boomers who are on the brink of retirement. This post explains why. Have a look!
Part 2 in the Don’t Outlive Your Money Series.
Buenas tardes, y’all! I came across a Market Watch article saying folks are more afraid of running out of money than they are of death.
Not on my watch, Boomer. This series is designed to make sure that doesn’t happen.
So don’t get distracted by the flawed financial planning tool called the retirement replacement ratio. I’m alerting you to it, so you don’t fall prey to thinking it applies to you.
If your pre-retirement spending is $100,000 and you plan to live on $70,000 in retirement, your retirement replacement ratio would be 70%.”
What’s the retirement replacement ratio?
It’s the ratio of your post-retirement spending divided by your pre-retirement spending. (Some people use the term income rather than spending when describing this ratio.)
So, if your pre-retirement spending is $100,000 and you plan to live on $70,000 in retirement, your retirement replacement ratio would be 70% ($70,000/$100,000 = 70%).
Boomer, the retirement replacement ratio might be okay for your mid-career adult children, but not for you. It’s no good.
The U.S. Government Accounability Office reported that the majority of financial planners they surveyed found that these replacement ratios only benefit early and mid-career workers. Such ratios give younger workers a goal for how much to save. When setting their retirement goals, these workers are commonly urged to aim for between 70% and 85%.
But if you’re in a low-wage job, you may need more than 85%. Conversely, if you’ve got money coming out the, wazoo, defined here, you may need a lot less than 70%.
A ratio approach isn’t realistic for Boomers approaching retirement.
The majority of planners surveyed in the Government Accountability Office report indicated a better approach is to help folks:
- identify expenses,
- determine which expenses will carry over into retirement, and
- assess how much income will be required to cover these expenses.
Translation: track your expenses so you’ll know just how much income you’ll need in retirement. (I just saved you a $250 consultation.)
What?! You’ve done this already?
However, if like most mere mortals, you’re not exactly sure where all your money goes…
Help is on the way!
Boomer, Part 3 of the Don’t Outlive Your Money Series will help you identify where the money goes. Knowing where it goes will help you identify how much will carry over into retirement. From there you can figure out how much retirement income you’ll need.
Then you’ll live (financially) happily ever after.