5 Steps To Take, In The 15 Years Before Retirement, To Make Sure You Don’t Run Out Of Money

For years, financial planners have espoused general formulas for determining the amount of income people will need in retirement. The most popular: the “70% rule,” which suggests that retirees will need to replace just 70% of their pre-retirement income to provide for their living needs in retirement. That may have been an effective guideline a few decades ago when the rule was established. However, relying on it today may be fraught with financial peril.

Why the Old Retirement Formulas Don’t Work

It’s a very different world now, and old guidelines based on conditions that existed 30 years ago don’t necessarily reflect the realities of aging today such as these:

  • A male turning 65 years old today can be expected to live another 19 years, on average, compared with 11 years in 1970; women can expect to live another 23 years
  • The chance of a retiree or an elder family member requiring some form of long-term care is now 7 in 10.
  • Many of today’s retirees carry debt into retirement, including mortgages, consumer debt and student loans
  • Although inflation has moderated somewhat since the 1970s, lifestyle costs such as housing, food and transportation consume a larger portion of a retiree’s budget today.
  • Although health care cost increases have slowed, their rate of increases continues to be well above the general rate of inflation.

For many retirees, the 70% income replacement rule might be an acceptable baseline for planning; however, with the risk of inflation compounded by the longevity risk now confronting retirees, it’s not inconceivable that, for some retirees, their income replacement need could be as high as 100%.

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