There are numerous myths, rules of thumb, traditions and other shortcuts surrounding retirement planning. Fallacies and poor assumptions are behind many of them.
Using the shortcuts can reduce your financial security in retirement and make it harder for most people to have successful retirements. Yet, these traditions are widely-accepted and widely-used.
Two widespread myths concern when people retire and how much of their employment income they need to replace in retirement.
Actual experience differs from the traditional beliefs and many people’s expectations, as demonstrated in the recent “Guide to Retirement” from J.P. Morgan Asset Management.
Most pre-retired people think they’ll retire at age 65 or beyond. Surveys indicate about 70% of Americans don’t expect to retire before 65.
But the experience of retired Americans is very different. The median retirement age of current retirees is age 62, and only 28% retired at 65 or later.
Most of the reasons people retired earlier than originally intended were out of their control. Downsizing or other changes at employers accounted for 32% of early retirements, and another 13% retired early because they were offered an early retirement package or incentive.
Personal health issues led to 31% of early retirements, and health issues of a spouse or other family member caused an additional 13% of earlier-than-planned retirements.
Only 39% of current retirees left the workforce early than planned because they realized they could afford to, and another 19% retired before 65 because they wanted to do something else.
Most of those who continue to work after 65 do so because they want to. Staying active and involved was the reason 52% of older workers gave for staying in the labor force, while 38% said they enjoyed working.
Another widespread myth is the replacement ratio. That’s the percentage of the final year’s employment income a retiree needs to pay expenses in retirement.
A common retirement rule of thumb is that people should plan on a replacement ratio of 80%, meaning their retirement income should be 80% of their last year’s income from working.
The data show the issue is more complicated than the rule of thumb. The lower one’s final employment income, the greater the replacement ratio.
Someone who earned $30,000 or less before retiring needs a replacement ratio of 104%, according to the J.P. Morgan Asset Management study. The replacement ratio doesn’t fall to 81% until the final working income was $80,000.
Someone with a final earned income of $200,000 has a replacement ratio of only 60%, according to the report.
It’s important to recognize that these are only averages. Spending varies considerably from retiree to retiree, even when two retirees have similar earnings histories and savings.
It’s important to determine the lifestyle you want in retirement and make a solid estimate of how much that will cost. Different people can want wildly different retirement lifestyles, and the cost can vary just as wildly.
Also, for many people the level of spending changes through retirement. Typically, spending is relatively high in the first years of retirement but steadily declines as people age.
It’s important not to use rules of thumb, other people’s experiences or similar guidelines in your retirement plans. Realize that every person’s situation is different and that every plan needs flexibility for contingencies and changes.
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