Retirement projections frequently overstated
By Dan Berman
Retirement income projections often overstate the amount needed, according to a Morningstar analysis, which suggests that forecast should take a more individual approach.
“There are three common assumptions that many software tools and financial advisors use to come up with a retirement savings goal – a 70 or 80 percent replacement rate based on pre-retirement income, an income need that rises with inflation, and a 30-year retirement time horizon,” David Blanchett, head of retirement research for Morningstar Investment Management, said in a news release. “When we looked at actual retiree spending patterns and life expectancy, however, we find that these assumptions don't hold true for many people.”
Common reductions in expenses often overlooked include not needing to save for retirement or pay Medicare and Social Security taxes, the analysis said.
Instead of a one-size-fits-all approach to forecasting financial needs, retirees and their advisors should take a more personal approach, Morningstar said, because the savings needed by households over 30 years can vary by as much as 20 percent.
Lower income households, Morningstar found, need to replace a higher percentage of their income because they pay less in taxes. A household with $20,000 in yearly income would need to replace 94 percent in retirement. One with $90,000 in income would need 78 percent of that to fund retirement.
The analysis also found that retirees apparently adapt to the money they had available. For instance, it found that household who spent less and saved more for retirement tended to increase consumption. Those who spent more and saved less reduced consumption during retirement.
And, Morningstar said, although a common assumption among retirement planners is that spending generally increases based on inflation, it is higher in the first years, drops and then rises at the end, creating a graph that looks like a smile. It is unclear if that spending pattern emerges because of want or need.
Originally published on BenefitsPro.com