Can You Live Comfortably in Retirement on 80 Percent of What You Earn Now?

Can You Live Comfortably in Retirement on 80 Percent of What You Earn Now?

I don’t know who determined this, why it is so, or how it even came to be, but there appears to be a widespread agreement of sorts that in retirement, folks need to replace somewhere between 70 and 75 percent of their pre-retirement incomes in order to maintain the same standard of living. I’ve seen 401(k) brochures and even some so-called retirement advice books that use this – in my opinion – completely crazy idea.

According to the 2008 Replacement Ratio Study, conducted by Aon Consulting and Georgia State University, the “new and latest” replacement income ratio is between 81 and 88 percent. It’s pretty much saying that going forward, you should use this range for your planning.

But Should You Even Bother?

Sure, there’s some value in these kinds of studies/reports – otherwise, they wouldn’t be conducted and published, right? However, I happen to be one of those guys who wouldn’t waste valuable time and effort to consider theories like this. And here’s my reasoning:

Is it that easy to plan for replacement income percentage? As in, just take the widely agreed upon number and follow it to be okay? How many REAL-LIFE retirees can attest to the validity of any of these theories? I have been helping REAL folks with their retirements for a number of years now. And for some reason, they seem to need to replace much, much higher percentages of their pre-retirement incomes – we’re talking somewhere in the neighborhood of 100 percent to even more than that. Sure, there are some who need much less, but I haven’t seen very many in that category. But I’m sure they are coming soon – in theory.

Even if you’re not yet retired, you probably at least know a couple of retired folks, so I encourage you to perform a quick real-life study of your own, just like the ones we perform here at CSU (Common Sense University) on an almost daily basis. Just ask a retiree and listen closely to their response – it’s that simple! And by the way, CSU is the school from which every Laser Financial Group strategist must graduate.

In Real Life…

Every day, I meet with folks just like you who tell me they would like to maintain at least their pre-retirement standard of living. And as you’d expect, pretty much everyone would like to kick it up a notch and enjoy an even higher standard of living – if they can afford to. I can relate to that!

Just the other day, I met with a client who currently earns about $52,000 a year and is looking to retire in the next couple of years. He desires to travel and see the world as much as he can, after working all his life. Should I have told him that based on the most updated Replacement Ratio numbers, he should expect to do just fine and maintain his standard of living with an income of about $42,000 per year (which is 81 percent, as the study recommends), and send him on his way? And remember, this is a much higher percentage than all the previous ratios. But seriously, does this make any sense whatsoever to you?

Following the Common-Sense Approach, we priced out what he does today and what he intends to do during retirement, using realistic estimates, and came up with a pretty good number. In his case, it was pretty clear to him, with my guidance, that the only real change will be that he will no longer be working at his job. His rent, gasoline costs, grocery bill, phone and cable bills, etc. will be EXACTLY the same. He will not automatically receive a 20 percent break from all those service providers, simply because he will be retired. That would be nice, but for now it’s merely a wish.

Sure, there are discounts on things like movie tickets and certain restaurants like IHOP, but how much do those really add up to? Also, recall that this gentleman intends to travel, as most folks do, but the last time we checked, we did not find any 20 percent discounts on travel prices for retirees. You may be beginning to get my drift here. It does not have to be that complex – just look at real life!

There seems to be this dilemma where on the one hand, folks are hearing that one size does not fit all. Yet on the other hand, the very same people are being told to plan their lives around some magic number that has absolutely nothing to do with their individual lives. I’m sure there are folks out there somewhere for whom these kinds of theories work perfectly – I just haven’t met any yet.

Here’s the bottom line. You can always make a good financial decision with lots of common sense. The great news is that you have it, so please use it!
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