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%.