Affluent May Be Underestimating Retirement Needs

[SumDay]

Despite a general sense of confidence in their financial readiness for retirement, affluent Americans might be overlooking critical tenets of retirement planning, according to a new Schwab survey of approximately 1,800 investors across nine major U.S. markets. More than eight in 10 (84 percent) investors say they have a retirement plan in place, and 80 percent of these respondents say they are confident about their financial readiness for retirement.

Affluent Americans May Be Underestimating Their Needs in Retirement Says New Schwab Survey - Yahoo! Finance

 

[ziggy29]

It looks like they are basing their "overconfidence" claim off of this snippet:

However, when it comes to estimating how much money they’ll need once they actually retire, respondents say they’ll need on average around $66,000 in income annually, far lower than their current average income that is approximately $115,000.

I expect us to need about 40% of our current income, 50% tops. I guess I'm really delusional, then.

This, on the other hand, seems odd to me (my emphasis added):

The survey also finds that, on average, respondents plan to work until they are 67 years old and expect to live to the age of 86, suggesting that they anticipate living off their retirement savings for less than 20 years. When asked directly how many years they anticipate living off of their savings in retirement, people say 21 years, on average.

Work until 67? Yuck. And they may not expect to live past 86, but if they don't plan to do so they are at severe risk for outliving their money unless the combination of SS and any pensions they may receive are comfortably more than their expenses...

 

[lrak]

$115k income

- $32k taxes (social security - medicare - state taxes - federal taxes)
- $17.5k (roth 401k)
- $5k (roth ira)
- $5k (spousal roth ira)
=
$55.5k take home


Shouldn't the question be ... is $55.5k take home (or whatever actual take home is) reasonable on $66k retirement income. In my example, take home pay is less than half of income.

 

[MichaelB]

$115k income

- $32k taxes (social security - medicare - state taxes - federal taxes)
- $17.5k (roth 401k)
- $5k (roth ira)
- $5k (spousal roth ira)
=
$55.5k take home


Shouldn't the question be ... is $55.5k take home (or whatever actual take home is) reasonable on $66k retirement income.

+1

 

[Bikerdude]

“Even with Medicare benefits, a 65-year-old couple could need nearly $400,000 to cover out-of-pocket healthcare costs during retirement, according to research by the Employee Benefit Research Institute*, and it’s widely accepted that those costs could rise significantly in the future,”


I would estimate that 90% of retiree's do not have that kind of money. I thought that's what a 'Medigap' policy was for? What happened to the $280,000 estimate for a couple (which included Medicare costs) just published recently.

 

[ziggy29]

Shouldn't the question be ... is $55.5k take home (or whatever actual take home is) reasonable on $66k retirement income. In my example, take home pay is less than half of income.

Obviously, it's different for all people, but there are also many things you can count on in retirement in terms of "needing" less money:

* Lower marginal and effective income tax rates from lower income
* No more contributions to 401K, IRA, pension
* No more SS and Medicare taxes

Also, some households are in a position by the time they retire to have no mortgage any more. Some may also choose to keep one car instead of two. More still may decide they have now the time and energy to prepare their own meals instead of eating out more. All of these chip away at how much one needs in retirement relative to before. Sure, health care costs can be higher (though they could be a quite a bit lower when you consider a 60-something buying their own insurance and then getting on Medicare), and travel/leisure expenses could be higher (but that's optional and controllable).

 

[REWahoo]

What happened to the $280,000 estimate for a couple (which included Medicare costs) just published recently.

The referenced study gives a median and worst case example. The $400,000 is the later:

For example, take a married couple in which both spouses are now 65. They are in good health, so they expect to use the median amount of prescription drugs in retirement, and they are satisfied with a 50% chance of meeting their lifelong health care costs. Such a couple should have $163,000 in savings, EBRI concluded.

On the other hand, suppose that same couple expected to be in the 90th percentile of prescription drug usage and also wanted a 90% chance of having enough savings. Such a couple would need savings of $387,000, according to EBRI.

Health Care May Cost Nearly $400K for Retired Couple | Financial Planning

 

[audreyh1]

Affluent Americans May Be Underestimating Their Needs in Retirement Says New Schwab Survey - Yahoo! Finance

Methinks these writers, as usual, underestimate the amount of that income that is not spent, but rather saved for retirement. AND they conveniently forget the drop in taxes after retirement - especially with lower income.

 

[Live And Learn]

ut oh - my 240k in healthcare spending after age 65 is understated. I used the Fidelity study numbers of 12k for 20 years. In this case I'm actually willing to say "oh well" I'll deal with it when I have to. I'm trying to keep myself from my natural tendancy to use 'worst case' for all expense types / scenarios. I'll get there !!

 

[Stanley]

Doesn't anybody screen this stuff before it goes to press?

Sorry, I forgot this is the internet age where journalistic standards are tossed to the wind in order to get people to the websites.

 

[sheehs1]

“Even with Medicare benefits, a 65-year-old couple could need nearly $400,000 to cover out-of-pocket healthcare costs during retirement, according to research by the Employee Benefit Research Institute*, and it’s widely accepted that those costs could rise significantly in the future,”


I would estimate that 90% of retiree's do not have that kind of money. I thought that's what a 'Medigap' policy was for? What happened to the $280,000 estimate for a couple (which included Medicare costs) just published recently.

Agree. I know elderly currently are on Medicare and I know that have not spent that much, do not plan on it nor do they have it to spend. Aside from their monthly premiums for part x and prescriptions they don't have to pay anything. Granted that may change and there are extremes to any general statement.

I bet they recommend retiring on current income levels. Can't think of any brokerage that wants their clients to start "taking their money out on a monthly basis". The longer it is in, the more money for the brokerage. They probably see the probability of more money coming out of the market as more baby boomers retire. Hence these articles.

I started routing my tax free dividends out of the taxable account this year (1) to get it into place and (2) just to see if it is something I want to continue. My advisor makes a comment about it every time we talk. Not going to leave it in there for him to take fees on. Not anymore. If I want to route it back I can.

 

[daylatedollarshort]

According to the Consumer Expenditure Tables average health care expenses for household 65 and over are under 5K a year. Most of these articles seem to be scare stories to so people work longer and turn over more money to investment companies.

Once the kids are done with college, our retirement expenses will be less than 20% of our previous gross income. And we still make double that just working on and off for now.

If your kids are grown, you have a paid for house, and you don't have to live in a high cost area to be near jobs, how much do you really need to have a nice middle class or even upper middle class life in retirement? Especially if you have cheap hobbies like biking, kayaking, gardening and camping?

 

[W2R]

It looks like they are basing their "overconfidence" claim off of this snippet:



I expect us to need about 40% of our current income, 50% tops. I guess I'm really delusional, then.

Nope! In retirement I am living the Life of Reilly on 37% of my gross income during my working days. Like you, I saved a lot for retirement when I was working.

 

[GolfingDuo]

Doesn't anybody screen this stuff before it goes to press?

Sorry, I forgot this is the internet age where journalistic standards are tossed to the wind in order to get people to the websites.

This doesn't only go for websites too. Much of the shoddy journalism is in print. It is no wonder why Time magazine is being dropped like a hot potato.

Nope! In retirement I am living the Life of Reilly on 37% of my gross income during my working days. Like you, I saved a lot for retirement when I was working.

And you have time to give us great advice, remove crazy posters here and make toast!

 

[W2R]

This doesn't only go for websites too. Much of the shoddy journalism is in print. It is no wonder why Time magazine is being dropped like a hot potato.



And you have time to give us great advice, remove crazy posters here and make toast!

Thank you! Well, maybe not toast, but I did make a pumpkin smoothie yesterday that Weight Watchers would approve of.

 

[GolfingDuo]

Thank you! Well, maybe not toast, but I did make a pumpkin smoothie yesterday that Weight Watchers would approve of.

 

[Milton]

Also, some households are in a position by the time they retire to have no mortgage any more.

YMMV, but I would suggest that anyone FIREing should have the mortgage paid off (if not long before: few things speed up the retirement savings process like eliminating that ongoing expense). Funding debt in retirement doesn't seem terribly prudent.

 

[GalaxyBoy]

I was on the Schwab web site at lunch today and on a lark decided to take their "retirement quiz." My answer to the question, "how much income do you expect to need in retirement?" was 70% (which, IMHO, is high). Their answer was between 90% and 100% because studies show that many retirees, in the early years of retirement ,actually spend more than they made while working. That may be true, especially if one plans bucket list travel or whatever, but only a fool would do that without planning.

 

[youbet]

studies show that many retirees, in the early years of retirement ,actually spend more than they made while working.

That would be true for us. I was a pretty busy guy with a lot of international travel my last few years on the job while DW, already RE'd, was home hanging around the house bored. When I retired, we had time to spend money on travel, a modest RV, a new car for the kids, did some fix-ups on the house, etc., etc. It was easy to actually have spending our first few years of FIRE exceed the last few years of working.

I think it would be risky for FA's, authors and others who might influence the general public on what it takes to retire to emphasize that you won't need more than half of your pre-retirement income in retirement. Personally, I don't think the general population is over-saving for retirement and a few warnings intended to spur thought on retirement planning aren't inappropriate. Even if the warnings are actually excessively conservative as this article seems to be.

 

[youbet]

Once the kids are done with college, our retirement expenses will be less than 20% of our previous gross income. And we still make double that just working on and off for now.

I'm curious, why are you still working on and off now? I'm assuming it's because you have something you like to do that pays but you enjoy it so much you'd do it for free......... That's a really fortunate situation.

 

[daylatedollarshort]

I'm curious, why are you still working on and off now? I'm assuming it's because you have something you like to do that pays but you enjoy it so much you'd do it for free......... That's a really fortunate situation.

Yes, it is a home business that started as a hobby. It is fortunate in some ways, but then again there is some truth to the saying you make your own luck. We put in a lot of hours over the years to get things to where they are today.

 

[foxfirev5]

I don't know where to start. First of all using current income to project retirement needs is irresponsible to say the least. My DW and I saved over 50% of our income in our peak years and currently live on less than that just prior to retirement. It's all about expenses in relation to income. These clowns can't grasp that there are actually people out there who do not spend every cent they make.
As far as healthcare goes -who knows. At some point you have to take a leap of faith and go for it. I'm getting closer.

 

[ERhoosier]

Doesn't anybody screen this stuff before it goes to press?

Sorry, I forgot this is the internet age where journalistic standards are tossed to the wind in order to get people to the websites.

Agree. OP's article is unclear on many points, inc whether income was gross or net (after-tax). That marginal tax rate after retirement can make HUGE difference.

 

[HighRoller]

I was on the Schwab web site at lunch today and on a lark decided to take their "retirement quiz." My answer to the question, "how much income do you expect to need in retirement?" was 70% (which, IMHO, is high). Their answer was between 90% and 100% because studies show that many retirees, in the early years of retirement ,actually spend more than they made while working. That may be true, especially if one plans bucket list travel or whatever, but only a fool would do that without planning.

Like so many things it varies by individuals. For me, I probably wouldn't have retired if I thought I would need 90 or 100% of my final income in retirement. I needed less than 40% of my salary when I was working "and was very happy with my lifestyle" so I can't even imagine needing more than twice that in retirement.

 

[audreyh1]

I was on the Schwab web site at lunch today and on a lark decided to take their "retirement quiz." My answer to the question, "how much income do you expect to need in retirement?" was 70% (which, IMHO, is high). Their answer was between 90% and 100% because studies show that many retirees, in the early years of retirement ,actually spend more than they made while working. That may be true, especially if one plans bucket list travel or whatever, but only a fool would do that without planning.

We set aside extra for the first few years as an extra "travel budget". That's easy to add to the planning without assuming one is going to spend the larger amount every retirement year.