Retirement income is a hot topic for anyone considering their post-work plans. Clients regularly ask financial professionals how much money they’ll need for each year of retirement. Over the years, common wisdom indicates new retirees should aim to make between 80 and 85 percent of their pre-retirement income during their first year out of the workforce. It’s generally thought that consumers who hit that mark will be able to combine their new retirement income with existing savings to maintain a consistent level of spending.
Of course, people’s goals for retirement change over time, and societal pressures may mean that the 80 percent rule is no longer an adequate measurement of someone’s retirement readiness.
Is the 80 percent rule shortchanging consumers?
LifeHealthPro investigated the 80 percent rule to try and find out if it is still a good target for people entering retirement. After all, money that consumers set aside for retirement income should not be used for other expenses during life.
They noted that the 80 percent rule assumes that consumers intend to continue spending at a level similar to their pre-retirement activity in retirement. That may not be an accurate supposition. In fact, many people see their spending go down in retirement, for a variety of reasons. Children are out of the house by the time most people retire, mortgage payments are a thing of the past and people are more likely to downsize their home than upgrade.
Combine that reality with the fact that people’s income generally peaks immediately before retirement, and the 80 percent rule starts looking a bit unrealistic. Clients may actually have more financial freedom during their working life than the 80 percent mandate provides, and financial professionals can still help them adequately plan for retirement without adhering to it.
The need for long-term care
While people’s expenses tend to decrease in retirement, one cost that people fail to anticipate involves long-term care. Many people who live full and active lives need the assistance provided by a live-in nurse or will move to a nursing home for their final years of life. According to CNBC, 70 percent of people over the age of 65 require some type of long-term care. This can be a major expense, and can catch many consumers off guard. Financial professionals should introduce their clients to long-term care insurance options that defray the cost of this care and improve consumers’s quality of life in retirement.