For many people, the retirement world is a foreign place full of unfamiliar concepts and terminology. To help navigate the often complex range of retirement related decisions, financial planners have come up with a number of statistics. A review of some of these guidelines along with a few other related metrics follows.
80% How Much Pre-Retirement Income You Need in Retirement.
The thinking is, even though you have more opportunity to spend in retirement, many of the expenses you incurred before you stopped working are gone. Recent research by Morningstar indicates that while retirees do indeed tend to spend less, how much less varies by income level. Those who earn more, ironically, spend a smaller percent of their pre-retirement income as many of life’s big costs (college education, retirement funding etc..) disappear. Not surprisingly, we see a great deal of variability around retirement spending habits in our own practice. For most, spending follows a U curve with higher expenses early on in retirement for things like travel, a drop later as people age and then a pick-up again at the end of life for healthcare spending (see below.)
4% The withdrawal rate that can be sustained over an average retirement.
The 4% withdrawal rate is probably one of the most widely used and least understood “shortcuts” used in retirement planning. The concept is that investors who limit their initial withdrawals to 4% of their portfolio’s market value (and then adjust that for inflation) have a 90% chance of maintaining their portfolio over a 30 year retirement. While this metric provides a decent “ballpark” estimate, investors should be careful not to rely on it too heavily for several reasons. First, the supporting research assumes that portfolios are invested according to a 60% stock and 40% bond mandate. Many investors will not adhere to this strategy throughout retirement. Second, recent studies have pointed out that the order of returns not just the average level has a big impact on portfolio longevity. Individuals who begin retirement during a market downturn, for example, experience much worse outcomes than those who retire during a strong market. A better approach? If you have the bad luck of experiencing poor market returns early on in retirement, consider reining in your spending until market valuations improve and then re-evaluate your withdrawals every few years.
76% The increase in monthly benefit you can expect by delaying claiming Social Security from 62-70.
The benefits of delaying taking Social Security are well worth repeating. When Social Security began back in 1935, the average American worked until age 65 and had an average life expectancy of 66.5 years. Today, the average retirement lasts well over 25 years. If you cannot afford to delay claiming or have reason to believe you may not live past 80 than this approach may not make sense but for many it is one of the best ways to ensure that you don’t outlive your funds.
60% The percent of total lifetime healthcare expenditures incurred during the last 6 months of life.
Healthcare costs can be a big unknown for retirees. Practicing healthy habits like getting plenty of exercise and eating well can go a long way to reducing the risk of heavy healthcare spending. But consider that the average person spends $39,000 on healthcare out of pocket in the last five years of life and the top 10% can spend more than $89,000. What to do? Take a careful assessment of your family health history to see if long term care insurance makes sense (see last month’s newsletter). Remember, while Medicare and most private health insurance covers costs such as doctors visits and hospital stays, they do not cover most custodial related long-term care costs.
85 The average life expectancy in America today.
Just imagine how much easier retirement planning would be if we knew exactly how long we will live. While this information is unavailable to us mortals, you can take a stab at estimating your life expectancy at www.livingto100.com.