The Daily Item, Sunbury, PA

Business

January 6, 2014

The Color of Money: Getting your 'number' right

— If you resolved to save more for your retirement in 2014, you may be happy to hear about some new research on estimating the income you'll need.

     To have enough money for when you are no longer working, you have to know your "number." That is a calculation based on various factors such as the rate of inflation, how much you are expecting from Social Security, an estimate of how much your investments might earn and how long you think you might live. The calculation also estimates the percentage of pre-retirement income you'll need to replace. That percentage is called your "replacement rate."

     It used to be retirees would estimate they could make do on about 40 percent to 50 percent of what they used to earn a year because they wouldn't have the same costs they did while working. Their children are grown and on their own. They probably wouldn't have a mortgage or all the expenses associated with working, such as commuting costs.

     But many of today's retirees want to live life more abundantly. Their children and grandchildren may not be close by, so they need to budget to travel to see them. And many won't pay off their mortgages before they retire. So retirement calculations may suggest they need to replace about 70 percent to 80 percent of their yearly pre-retirement income because their expenses won't greatly be reduced in retirement.

     Still, the higher assumptions so common now might be too much, leading people to overestimate how much they will need to fund their retirement, according to research by David Blanchett, head of retirement research for Morningstar Investment Management, a unit of Morningstar.

     "While a replacement rate between 70 percent and 80 percent may be a reasonable starting place for many households, when we modeled actual spending patterns over a couple's life expectancy, rather than a fixed 30-year period, the data shows that many retirees may need approximately 20 percent less in savings than the common assumptions would indicate," Blanchett writes in his research paper.

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