Ask five financial planners how much income you'll need in retirement, and you're bound to get five different answers. But despite the multitude of factors that can impact the answer to this question, retirees have generally fallen back on the assumption that they'll need approximately 70% of their pre-retirement income in order to avoid scaling back their lifestyle in their golden years.
Confidence in this general benchmark was recently confirmed by the 2015 Retirement Confidence Survey, which found that more than half (56%) of workers surveyed "expect to be able to manage in retirement with no more than 70% of their preretirement income." The survey went on to note that another 23% of workers expect to be able to manage with 70%-85% of their preretirement income, while 16% feel they need an income replacement ratio in excess of 85%.
For the typical single American, this means they'll need somewhere along the lines of $36,400 in annual income during retirement. This estimate follows from the fact that the median household income among U.S. workers is approximately $52,000 a year according to the latest data from the U.S. Census Bureau. Multiply that by 70%, and you get $36,400.
But is this enough? After all, the 70% replacement ratio is nothing more than a helpful benchmark -- albeit one that's been relied upon by millions of prospective retirees for years, if not decades. The rationale is that your expenses will go down in retirement. You'll no longer have to drive to work, purchase work attire, or save for retirement, as you've already arrived. In addition, among homeowners aged 65 and older, only a third of them have mortgage debt.
The survey cited above confirms that this rationale is correct. It notes that 57% of retired respondents live on no more than 70% of their pre-retirement income. A further 12% peg the figure at between 70% and 85% of their former earnings. And 12% say they live on more than 85% of their pre-retirement income. Consequently, while the average person would unquestionably prefer a higher income, it seems like a 70% replacement ratio is at least sufficient to care for the needs of a majority of Americans in retirement.
This isn't to say that there aren't exceptions to this rule. Most importantly, a surprising number of retirees continue to provide financial support to others. According to the 2015 Retirement Confidence Survey, an estimated two out of 10 retirees currently provide financial support to either a friend or a relative, with the most common beneficiaries of support being children and grandchildren. This undoubtedly puts a strain on a retiree's finances, and could therefore call for a higher replacement ratio.
Aside from exceptions like this, so long as you've paid off your mortgage and are otherwise free of extraneous financial entanglements, it's fair to say that average Americans can get by in retirement on 30% less income than they needed during their working years.
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