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55%, 80%, Nay, it's 135%!!
Old 09-09-2011, 09:07 AM   #1
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55%, 80%, Nay, it's 135%!!

The replacement ratio rule of thumb suggests you might need 75% of your current salary from a variety of sources — be it Social Security, personal assets (a 401(k) and IRA, for instance), earned income (yes, you’ll likely be working in retirement), and the like — to enjoy the same standard of living while in retirement as before.

But according to research conducted by Dan Ariely, people need 135% of their final income to live the way they want in retirement. The reason for this astounding difference has to do largely with the way Ariely, a professor of economics and behavioral finance at Duke University, did his research
Will you need 135% of your salary in retirement? - Robert Powell - MarketWatch
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Old 09-09-2011, 09:16 AM   #2
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The study is flaw from the start when he asks:

"How do you want to live in retirement? Where do you want to live?"

This is want not need.

Such a waste of time.
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Old 09-09-2011, 09:28 AM   #3
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Well that's no surprise. We already know most people save far too little to maintain even their current lifestyle. On top of that, we know that many people today live above their means...so essentially their CURRENT lifestyle costs more than 100% of their "end of work" earnings.

I think his work is still valid though...basically it says "If you're not saving enough now and want to live a certain way when retired that's likely better than you live now, you'll need to somehow increase your income to 135% of your end of work value."

For some people, that may be the wakeup call they need.
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Old 09-09-2011, 09:31 AM   #4
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Originally Posted by huusom View Post
"How do you want to live in retirement? Where do you want to live?"

This is want not need.

Such a waste of time.
A lot of people need that in order to be yoked back to reality about what they can afford to do in retirement.

But then I have always figured that many people are dancing on air when it comes to many things. Why should their approach to retirement be any different?

Maybe there is a "typical" retirement to which such formulas can be applied - but anyone spending a few minutes on this board knows that there is a hell of a lot of variety in the financial realities of retirement.

This article makes some good points along those lines:

Quote:
There is no single, correct replacement rate, VanDerhei and others said. In fact, there’s really no substitute for doing precisely what Ariely did: crunching the numbers. It’s not quick, but it’s more accurate than any rule of thumb. According to Chen, individuals should look at their own spending habits to decide how much of their salary they’ll need to replace.

This is easier said than done. “Most people do not start to think about how they would live in retirement until they are close” to it, Chen said, “and this type of financial planning has to be done a number of years before that.”

Others criticize the use of salary replacement ratios altogether. “Ariely’s calculation is as bad as what he’s criticizing,” said Larry Kotlikoff...

“What people want or need is irrelevant. The only issue of relevance is what they can afford to spend on a sustainable basis. The goal is not a number,” he said. “The goal is a smooth living standard through time. If financial planners haven’t gotten this straight by this point, they should hang it up. They are disserving their clients using a methodology that not a single trained economist would endorse.”
The target is always moving, and you have to remember the Tao of Uncle Mick: Agile, Mobile and Hostile
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Old 09-09-2011, 09:52 AM   #5
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This is why a "bottom up" retirement expense budget is so much better than a % of current income.

My estimates are 100% - kids expenses, work expenses, 401 saving all go away - but are replaced with extra travel and hobby costs.
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Old 09-09-2011, 10:00 AM   #6
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I wouldn't know what to do with 135% of my pre-retirement income.
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Old 09-09-2011, 10:02 AM   #7
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anyone spending a few minutes on this board knows that there is a hell of a lot of variety in the financial realities of retirement.
Excellent point, I agree.
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Old 09-09-2011, 10:03 AM   #8
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replaced with extra travel and hobby costs.
FABULOUS...that's what I'm planning too.
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Old 09-09-2011, 10:41 AM   #9
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“As for Ariely’s survey, one of the principles of behavioral economics is there is a difference between what people say and what they do,” Utkus said. “I don’t buy his study’s conclusions at all. I’d be curious to know: Were all of the people who wanted to retire at 135% of income saving 30% of their income each year...in order to achieve that goal? Probably not. So it’s just a wish list, nothing more.”
That is my reasoning. People's stated preferences differ from what they actually do. In order to believe the premise that people actually prefer to spend 135% in retirement, we would observe that happening routinely. That 135% replacement rate was determined in a vacuum devoid of real life constraints such as current spending desires, limited amount of years you can devote to earning, and limited lifespan.
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Old 09-09-2011, 11:58 AM   #10
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The criticisms of Ariely's work that Powell quotes make very little sense to me. For instance, to argue that once you've retired, you'll just have to stay within the bounds of your retirement income, is just a tautology. It's irrelevant to estimating a good value for what the retirement income should be.

Here is one of Ariely's conclusions:
Quote:
Using these calculations, we found that these people (who told us that they will need 75% of their salary) would actually need 135 percent of their final income to live in the way that they want to in retirement. If you think about it, this should not be very surprising: If you add 8 hours (or more) of free time to someone’s day, they will probably not want to spend this extra time by going for long walks on the beach and watching TV – instead they may want to engage in activities that cost money.
Dan Ariely » Blog Archive Asking the right and wrong questions «
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Old 09-09-2011, 12:15 PM   #11
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If they're saviing 30% of income now so that they can live on 135% of income in retirement then they are living on 70% of income now, nearly one half of retirement income. Would ANYONE seriously plan on denying their current self that much (and delaying retirement) in order to live it up after retiring? Sure I'd like 135%, but not that much.
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Old 09-09-2011, 01:13 PM   #12
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If they're saviing 30% of income now so that they can live on 135% of income in retirement then they are living on 70% of income now, nearly one half of retirement income. Would ANYONE seriously plan on denying their current self that much (and delaying retirement) in order to live it up after retiring? Sure I'd like 135%, but not that much.
The point is that people are unrealistic about their plans for retirement. They plan to go on a 30 year vacation and to pay for that they would need 135% of their salary. Most on this forum have a good grasp of their spending and are already comfortable living off a fairly small percentage of their salaries.

The question for us the becomes what's your retirement budget and we go away and take off the mortgage, add on health care costs etc and come up with a number that we need to generate form savings and SS.

Here's what I do

Pre retirement outgoings as %age of pre retirement gross salary

Saving 35%
Mortgage 21%
Fed tax 12%
State tax 3%
Medical 1%
Food, transport, everythingelse 28%

Post Retirement spending as %age of pre retirement gross salary

Saving 0%
Mortgage 0%
Fed tax 3%
State tax 1%
Medical 4%
Food, transport, everythingelse 25%

Total = 33%
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Old 09-09-2011, 02:53 PM   #13
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I wouldn't know what to do with 135% of my pre-retirement income.
+1

That figure is way off base for me, as well.
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Old 09-09-2011, 03:01 PM   #14
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I haven't kept good enough records to verify the 135% figure, but I'd say that's a good ballpark figure for me. Still, we did plan for it, so it's not like it was a big surprise (maybe just a little surprise in some areas). Animorph asked whether ANYONE would deny themselves during the working years to have the retirement they want. I would answer "yes" in my case. Oddly, it didn't seem like such a denial at the time - just part of the plan. Naturally, YMMV.
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Old 09-09-2011, 09:18 PM   #15
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I haven't kept good enough records to verify the 135% figure, but I'd say that's a good ballpark figure for me. Still, we did plan for it, so it's not like it was a big surprise (maybe just a little surprise in some areas). Animorph asked whether ANYONE would deny themselves during the working years to have the retirement they want. I would answer "yes" in my case. Oddly, it didn't seem like such a denial at the time - just part of the plan. Naturally, YMMV.

I take my comment back then. Wow, I thought I lived in the future more than the present. I guess a few here might beat me.

Our income was pretty variable before retirement, but we'll be at roughly 50% when fully transitioned. No kids to support, and no retirement savings are most of the difference.
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Old 09-09-2011, 09:58 PM   #16
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I can't even remember what my pre-retirement income was. What you need is based on the lifestyle you want in retirement and not the salary you had when you worked.
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Old 09-09-2011, 10:02 PM   #17
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I haven't kept good enough records to verify the 135% figure, but I'd say that's a good ballpark figure for me. Still, we did plan for it, so it's not like it was a big surprise (maybe just a little surprise in some areas). Animorph asked whether ANYONE would deny themselves during the working years to have the retirement they want. I would answer "yes" in my case. Oddly, it didn't seem like such a denial at the time - just part of the plan. Naturally, YMMV.
My answer would be "yes" also. We will be moving to an area with a much higher cost of living and plan to travel extensively. We also don't really feel like we are sacrificing much right now even though we are saving a huge percentage of our income.
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Old 09-09-2011, 10:17 PM   #18
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Dr. Ariely really isn't interested very much in how much people need to live their retirement lifestyle. He is a cognitive psychologist, and more interested in the bizarre ways that people arrive at whatver figure they choose, and also how generally useless FAs are in helping them to be more rational.

After all, ask someone what is his risk tolerance? You might as well ask how many angels can dance on the head of a pin.

He has a lot of interesting articles on his blog. Some of this stuff is quite subtle.

Ha
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Old 09-09-2011, 11:27 PM   #19
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After all, ask someone what is his risk tolerance? You might as well ask how many angels can dance on the head of a pin.
I have a modest proposal about determining risk tolerance, as it pertains to asset allocation. The percentage of stocks in a portfolio should be proportional to waist circumference. Although people cannot intuitively judge their risk tolerance, an observer can make a good estimate of how much present inconvenience they can tolerate for the sake of a future gain by measuring their spare tires. A large girth resulting from indulgence increases health risk, so fat people are evidently risk tolerant and should keep a larger proportion of higher risk assets in their portfolios.
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Old 09-10-2011, 04:43 AM   #20
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I haven't kept good enough records to verify the 135% figure, but I'd say that's a good ballpark figure for me. Still, we did plan for it, so it's not like it was a big surprise (maybe just a little surprise in some areas). Animorph asked whether ANYONE would deny themselves during the working years to have the retirement they want. I would answer "yes" in my case. Oddly, it didn't seem like such a denial at the time - just part of the plan. Naturally, YMMV.
What we wanted in retirement was to do some serious traveling. While working we did as much traveling as we could in the 20 days a year vacation DW had, so we weren't denying ourselves that desire by choice.

Our expenses (excl. taxes) in the 4 years before RE were pretty consistent, and the expenses during the 2 years after RE are 27% higher. I expect similar expenses continuing while we can still afford it and our desire for such travel remains high.
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