Finally, an end to the "80% of pre-retirement income" thumbrule

[Nords]

Linda Stern debunks a few zombie thumbrules.

"That's a ridiculous figure, pulled out of thin air. Investment companies say they often use that number to "help" people who don't have any idea of how to plan their retirement savings. But it mainly helps to scare people into thinking they have no hope of saving enough for retirement.
In truth, they may spend more than that in the first couple of years after they stop working, but they're likely to spend far less, on average, over their entire retirement period. By the time they are 75, they're likely to be spending about half of what they did when they were 50, according to the Labor Department's survey of consumer spending."

That's interesting, although it doesn't match Jarhead's experience as our senior ER. I wonder how the Labor Dept adjusted those figures for inflation.

She also takes aim at: "The asset allocation rule. Many planners also tell people to subtract their age from 110 and use the remainder as the percentage of their nest egg that they should have in the stock market."

Apparently target funds are raising their equity allocations to improve the survivability of their client's accounts.

 

[d]

rules of thumb are rules of thumb ... i generally find them useful as starting points, but they certainly need to be taken with a grain of salt. and, absent such "rules", many folks might be quite adrift. the 80% might not be on target for any given individual, but is certainly more useful than, say, "0% to 150%".

 

[REWahoo]

That's interesting, although it doesn't match Jarhead's experience as our senior ER.

Speaking of Jarhead (…he said, in what was an obvious thread hijack….), we haven’t heard from him in a while, but I think I’ve seen him on TV.

Anyone seen the Cadillac commercial with the…uh, ‘unconventional’ looking young golfer who claims to have shot in the low 70’s? Isn’t that Jarhead they ask if shooting “around a 71” is possible?

 

[TromboneAl]

My objection to that rule is that what you need should be based on expenses not income.

The guy who makes $150K per year and spends $30K per year is not going to need $120K per year when he retires.

 

[Nords]

My objection to that rule is that what you need should be based on expenses not income.

Linda Stern's one of the few who actually says that people should track their expenses.

I guess it just doesn't collapse into an easy soundbite for unmotivated savers...

 

[riskadverse]

My objection to that rule is that what you need should be based on expenses not income.

The guy who makes $150K per year and spends $30K per year is not going to need $120K per year when he retires.

Anyone who fails to understand the above logic needs deserves to have a financial planner.

 

[mathjak107]

Im already figuring we will need the same income in the early years of retirement as we know if we are home every day and out and healthy we end up spending alot of money.

 

[New Thinking]

Jack Vanderhei at EBRI also published research showing that 70-80% is much too low based on the risks retirees face. Food for thought.

http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3745

 

[lets-retire]

Al--No, but that would be whole lotta fun.

 

[REWahoo]

New Thinking,

In the spirit of full disclosure I think it only fair to point out your real-world status to those who may not be aware that you are employed by Prudential and are the author of a white paper advocating the purchase of immediate annuities. I’m not pointing this out to be critical, merely to be sure everyone reading this understands why they should expect the bottom line of your linked ERBI research to be “…how the purchase of annuities at the time of retirement may be used as an effective risk management technique…”

That said, I do think the discussions on the forum you've contributed to, particularly those involving delaying taking SS, are excellent. I know they have caused me to rethink my strategy on taking SS at 62, but I don’t think it will come as any surprise to you that I don’t plan to purchase an annuity to bridge the income gap.

 

[youbet]

My objection to that rule is that what you need should be based on expenses not income.

The guy who makes $150K per year and spends $30K per year is not going to need $120K per year when he retires.

TA - you are right on! And it works both ways. DW and I are treating ourselves to a higher budget in the first years of retirement than we did during our last few years of working in terms of a percentage of income. But it's all included in our WR projections and tested in Firecalc.

 

[Nords]

Jack Vanderhei at EBRI also published research showing that 70-80% is much too low based on the risks retirees face. Food for thought.

Tastes like pablum to me. The whole point of my post is that 70-80% of pre-retirement income is neither too high, too low, or "just right"-- it's irrelevant!! He could have based his research on the number of apples eaten each day or the number of miles driven or the number of lawns mowed and arrived at the same alarming conclusion.

Now if you base your retirement spending on your current spending, subtract what you won't do any more in retirement, and add in your retirement activities-- that has a pretty good chance of resembling accuracy and the risks can be more objectively evaluated. Then we can make up our own darn minds on annuities instead of being alarmed into them.

we know if we are home every day and out and healthy we end up spending alot of money.

Oddly enough, those are the same reasons that we don't end up spending a lot of money.

 

[Khan]

I was making $75K when I retired, went to a pension of $22K, now up to $26K; and I'm still saving.

I'm thinking of tapping the TSP, as I will need to replace the car eventually.

 

[donheff]

we know if we are home every day and out and healthy we end up spending alot of money.

Oddly enough, those are the same reasons that we don't end up spending a lot of money.

Yeah, I am not spending more with all my free time, although I do budget in a huge chunk for increased travel when DW cuts all the way back.

Being on this board gives us an element of immunity - we don't have enough time left to go to the mall and blow our cash

 

[FinanceDude]

Linda Stern debunks a few zombie thumbrules.

"That's a ridiculous figure, pulled out of thin air. Investment companies say they often use that number to "help" people who don't have any idea of how to plan their retirement savings. But it mainly helps to scare people into thinking they have no hope of saving enough for retirement.
In truth, they may spend more than that in the first couple of years after they stop working, but they're likely to spend far less, on average, over their entire retirement period. By the time they are 75, they're likely to be spending about half of what they did when they were 50, according to the Labor Department's survey of consumer spending."

That's interesting, although it doesn't match Jarhead's experience as our senior ER. I wonder how the Labor Dept adjusted those figures for inflation.

She also takes aim at: "The asset allocation rule. Many planners also tell people to subtract their age from 110 and use the remainder as the percentage of their nest egg that they should have in the stock market."

Apparently target funds are raising their equity allocations to improve the survivability of their client's accounts.

I don't like target or freedom funds, I have yet to see where they can beat any portfolio that a reasonable person could put together...........

 

[yakers]

I don't like target or freedom funds, I have yet to see where they can beat any portfolio that a reasonable person could put together...........

They are great because there many, many, many (financially) unreasonable people out there. For the clueless the targt funds are great. I have the bulk of my retirement funds in a Lifecycle Fund (Govt TSP account) I picked a later target year than anitcipated date of retirement and have a bit additional in the International Fund but leaving it alone is what has worked for me. I also have a Vanguard Roth account and some DRIP stocks. The key for me is low cost and long term buy & hold.
Undoubtedly there are some good stock pickers (brewer impresses me here) and I have done OK (in the sense of slightly beating the S&P500) but to get a really accurate picture of portfolio returns you would have to consider how many "reasonable" folks have lost money with "reasonable" portfolios.