Income Needed in Retirement
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Has anyone seen any research that shows generally about how much income is actually needed in retirement vs. how much people think they need?
For example, if you have someone that is 59 years old and they say they need $5,000 per month before taxes, I would imagine within the first few years they spend every dime of it. Then, at some point, they become more frugal with their money, so say at age 70, they only need 50% of that amount (adjusted for inflation). Has there been any study done that shows this in more general terms that you know of?You know at a couple, aged 65, will need over $225,000 for medical.
What will 3 trillion do to inflation? How about, whatever money you got, I'll give you three or four percent per year. In my experience, A lot of advisors are figuring 100% expenses. A lot of clients are spending 125% percent. Most people who have accumulated a moderate amount of money will spend around 80% plus medical, and those who have more will spend 100%, or just spend at 125% and run out. There is no accounting for human behavior. I'm sure if you've been around a while, you know that most projections are BS, and clients will do what you say. Now, if you're a cheapskate, you have to live with that... Do you think helping people do intelligent portfolio withdrawals helps justify charging 1%?Snags, I have had quite a few clients at the retirement point thus far. Here’s what I have seen:
1. Clients have no idea what they need to spend. They ASSUME they need the same GROSS paycheck as while they were working. But this is often not true. There are two types of people: the first type is conservative, and will not spend more than they did before retirement. In this case, they need LESS than their previous gross income. WHY? They are not contributing to a 401K, they MAY not be contributing to life insurance, disability, medical, and social security (and possibly other supplemental benefits). SO they need a smaller GROSS paycheck than before. So their 125K salary may need to be replaced by only 100-115K in gross retirement income (SS, pension, assets, etc.).
2. The OTHER type of retiree spends more time with the grandkids (and buys them sh*t all the time), travels more, finally gets those home projects done, eats out more, shops more, etc. They may need MORE than their previous income. This type of person is tough to ferret out because they may not KNOW they are going to do this.
3. Here’s the kicker…what I find happens MOST OFTEN is that someone spends a little more, a little less, or about the same (all within reason), but then they decide to (a) buy a new car, (b) replace the roof, © build that addition , (d) pave the driveway, (e) install a pool for the grandkids…whatever. Point is, all your best laid plans blow up because 6 months after you all agree on a 4% withdrawal rate, they call and tell you they need a check for $60K EXTRA this year. And BOOM! it all blows up.
YUP!Snags, I have had quite a few clients at the retirement point thus far. Here’s what I have seen:
1. Clients have no idea what they need to spend. They ASSUME they need the same GROSS paycheck as while they were working. But this is often not true. There are two types of people: the first type is conservative, and will not spend more than they did before retirement. In this case, they need LESS than their previous gross income. WHY? They are not contributing to a 401K, they MAY not be contributing to life insurance, disability, medical, and social security (and possibly other supplemental benefits). SO they need a smaller GROSS paycheck than before. So their 125K salary may need to be replaced by only 100-115K in gross retirement income (SS, pension, assets, etc.).
2. The OTHER type of retiree spends more time with the grandkids (and buys them sh*t all the time), travels more, finally gets those home projects done, eats out more, shops more, etc. They may need MORE than their previous income. This type of person is tough to ferret out because they may not KNOW they are going to do this.
3. Here’s the kicker…what I find happens MOST OFTEN is that someone spends a little more, a little less, or about the same (all within reason), but then they decide to (a) buy a new car, (b) replace the roof, (c) build that addition , (d) pave the driveway, (e) install a pool for the grandkids…whatever. Point is, all your best laid plans blow up because 6 months after you all agree on a 4% withdrawal rate, they call and tell you they need a check for $60K EXTRA this year. And BOOM! it all blows up.
I think you have to offer more than 3 or 4 percent to the typical middle class retiree. Yes, at 5 or 6 or 7 percent he might run out of money when he’s in his 80s, so you should tell him that, but most of them would rather enjoy 10 years of retirement taking trips or whatever and be willing to risk living in reduced circumstances in their 80s.
Also, you look at some of your clients lumber into the office and you know they’re not going to be around in 20 years. The boomers of today are not the hardy, wiry Depression-era 80-year-olds who live forever.
Unfortunately it seems choice 3 is becoming more common for me as people that have gotten used to having everything they want when they want it refuses to save from their retirement income for big expenses, and they also tend to be bored in retirement and spending money helps them pass the time. It scares me what is going to happen over the next 30 years with these people as they start to run out of money.
[quote=B24]Snags, I have had quite a few clients at the retirement point thus far. Here’s what I have seen:
1. Clients have no idea what they need to spend. They ASSUME they need the same GROSS paycheck as while they were working. But this is often not true. There are two types of people: the first type is conservative, and will not spend more than they did before retirement. In this case, they need LESS than their previous gross income. WHY? They are not contributing to a 401K, they MAY not be contributing to life insurance, disability, medical, and social security (and possibly other supplemental benefits). SO they need a smaller GROSS paycheck than before. So their 125K salary may need to be replaced by only 100-115K in gross retirement income (SS, pension, assets, etc.).
2. The OTHER type of retiree spends more time with the grandkids (and buys them sh*t all the time), travels more, finally gets those home projects done, eats out more, shops more, etc. They may need MORE than their previous income. This type of person is tough to ferret out because they may not KNOW they are going to do this.
3. Here’s the kicker…what I find happens MOST OFTEN is that someone spends a little more, a little less, or about the same (all within reason), but then they decide to (a) buy a new car, (b) replace the roof, © build that addition , (d) pave the driveway, (e) install a pool for the grandkids…whatever. Point is, all your best laid plans blow up because 6 months after you all agree on a 4% withdrawal rate, they call and tell you they need a check for $60K EXTRA this year. And BOOM! it all blows up.[/quote]
The fact is many don’t have enough assets to provide enough retirement income. As an FA you do the best you can with what they’ve got.
I use to mail out a McDonalds employment application with the question: Is this part of your retirement plan? It was also a handout at rollover seminars. UBS finally put the kibosh to that saying i couldn't use a real application. I then created a fake app and that didn't get past the compliance dept either. Ironcally, letters from peers offering illegal offshore tax shelters, OK, but, in your face retirement reality-not OK. Nor did they didn't like my picture of a train wreck mailer, captioned "Does this look like your portfolio?" No sense of humor.[quote=BondGuy]
I use to mail out a McDonalds employment application with the question: Is this part of your retirement plan? [/quote]Wow - that is truly brilliant.
Friggin UBS compliance....business prevention department.
That is awesome. I wonder if you could get a fake job description with base pay to fly in complience. Make it look like it’s a copy of an add in the classifieds.
just make 15% per year with low volatility and your client’s income needs shouldn’t be an issue
Snags - you’re asking a serious & important question. Here’s my general experience: 3 stages to retirement. First, what do people need? In my part of the country, 100% of their pre-retirement after-tax income (why would you want to retire if you’re retiring to a lower standard of living?)
The first stage involves travelling, snow birding, having fun - generally health is pretty good, and retirees are enjoying themselves. Stage 2 health begins to slow them down a bit & people generally focus a little more on family. At this point, generally inflation and health costs are biting into how far their income goes -- sometimes less travelling will help off-set this, but usually they will need a little more income from their portfolio. In addition, things they used to be able to do for themselves: yard work, painting, cleaning the gutters, snow removal, need to be hired out. Stage 3 is being elderly - health care and personal care costs are unpredictable and can be extreme. I'm guessing Snags is hoping that as people slow down, they spend less. They do slow down, but they spend more. Inflation erodes their purchasing power. They're living in an older house and driving an older car -- things break down and have to be replaced. Prescription and other out of pocket health care costs increase. The other really fun thing is that the stages aren't the same for everyone. I have some 60 year olds that are in the elderly stage & never were able to experience the earlier stages of retirement and I've had 90 year olds that were in their 2nd stage. Health and genetics make huge differences. Retirement income planning is very, very scary stuff!! Be extremely conservative, if people are over spending, be sure to document in writing to them that they are over-spending their funds. Also remember that life expectancy could change dramatically -- if medicine cures diabetes, or stem cell research allows us to grow new organs for people (who knows that the next 30-40 years will bring -- just look back over the past 40 years at the dramatic changes in life expectancy and the changes in health care). Last time I looked (and it's been quite some time) AARP had some excellent information and numbers of retirement income needs and planning.