What’s needed for retirement?
By Kristi Ellington
LPL Financial
What is enough? What is not enough? If you’re considering
retiring in the near future, you’ve probably heard or read that you
need about 70 percent of your end salary to live comfortably in
retirement.
By Kristi Ellington
LPL Financial
What is enough? What is not enough? If you’re considering retiring in the near future, you’ve probably heard or read that you need about 70 percent of your end salary to live comfortably in retirement.
This estimate is frequently repeated, but that doesn’t mean it is true for everyone. It may not be true for you.
You won’t learn how much retirement income you’ll need by reading this article. You’ll want to meet with a qualified retirement planner who can help you plan to estimate your lifestyle needs and short-term and long-term expenses.
That said, there are some factors that affect retirement income needs – and too often, they go unconsidered.
Health
Most of us will face a major health problem at some point in our lives – perhaps even multiple or chronic health problems. We don’t want to think about that reality.
But if you’re a new retiree, think for a moment about the costs of prescription medicines, and recurring treatment for chronic ailments.
These minor and major costs can really take a bite out of retirement income, even with a great health care plan.
While generics have slowed the advance of prescription drug costs to about 1-2 percent a year recently, one estimate found that a 65-year-old who retired in 2007 would need $215,000 to pay for overall retirement health care costs – up about 7.5 percent from 2006.
Heredity
If you come from a family where people frequently live into their 80s and 90s, you may live as long or longer. Imagine retiring at 55 and living to 95 or 100. You would need 40-45 years of steady retirement income.
Portfolio
Many people retire with investment portfolios they haven’t reviewed in years, with asset allocations that may no longer be appropriate.
New retirees sometimes carry too much risk in their portfolios, with the result being that the retirement income from their investments fluctuates wildly with the vagaries of the market.
Other retirees are super-conservative investors; their portfolios are so risk-averse that they can’t earn enough to keep up with even moderate inflation, and over time, they find they have less and less purchasing power.
Spending habits
Do you only spend 70 percent of your salary? Probably not. If you’re like many Americans, you probably spend 90 percent or 95 percent of it.
Will your spending habits change drastically once you retire? Again, probably not.
Most people only change spending habits in response to economic necessity or in pursuit of new financial goals.
People don’t want to “live on less” once they have had “more.”
Social Security (or lack thereof)
In 2005, SSI represented 39 percent of a typical 65-year-old retiree’s income. But by 2030, Social Security may only replace 29 percent of that income, after deductions for Medicare premiums and income taxes.
Since 1983, retirees earning more than $25,000 in SSI have had to pay income tax on a portion of their benefits. This is all presuming Social Security is still around in 2030.
So will you have enough?
When it comes to retirement income, a casual assumption may prove to be woefully inaccurate. Meet with a qualified retirement planner while you are still working to discuss these factors and estimate how much you will really need.
