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 If you've got a comprehensive retirement plan, then it probably includes a mix of employer benefits, government plans, and retirement savings accounts. You've probably also heard some of the "rules of thumb" on how much income you need. But your retirement income needs to last you a lifetime - which might be longer than you think.
In this article we're going to first start out by talking a little bit about life expectancy - trying to separate out some of the fact from fiction. Next we'll talk about retirement income - in depth - including how to go about calculating how much retirement income you'll need, as well as ways to project your retirement fund balances. Then we'll finish up with some tips on how to make retirement income last a lifetime.
Lifetime Retirement Income
There is a very good reason you'll read about the "rules of thumb" you can apply when planning for retirement - because life expectance is unique to individuals. Some of us will reach our twilight years in excellent physical condition, while others will develop diseases that will rob them of their full complement of retirement years.
When life expectancy values are quoted in the news, the age they're talking about life expectancy at birth. For example, a female's life expectancy is 80.0 years of age while a male's life expectancy is 74.7 years (at birth). But if you're lucky enough to reach retirement age, your projected life expectancy is going to be very different.
Life Expectancy at Retirement
If you're planning for retirement, then you need to be more aware of you're life expectancy as you're approaching those retirement years. The following two tables demonstrate this point:
Life Expectancy (Years)
| |
Male |
Female |
| Age |
Black |
White |
Black |
White |
| 50 |
24.7 |
28.7 |
29.8 |
32.5 |
| 55 |
21.1 |
24.5 |
25.7 |
28.0 |
| 60 |
17.8 |
20.5 |
21.9 |
23.7 |
| 65 |
14.8 |
16.8 |
18.3 |
19.7 |
| 70 |
12.0 |
13.4 |
15.0 |
15.9 |
| 75 |
9.6 |
10.4 |
12.1 |
12.5 |
Life Expectancy (Age)
| |
Male |
Female |
| Age |
Black |
White |
Black |
White |
| 50 |
74.7 |
78.7 |
79.8 |
82.5 |
| 55 |
76.1 |
79.5 |
80.7 |
83.0 |
| 60 |
77.8 |
80.5 |
81.9 |
83.7 |
| 65 |
79.8 |
81.8 |
83.3 |
84.7 |
| 70 |
82.0 |
83.4 |
85.0 |
85.9 |
| 75 |
84.6 |
85.4 |
87.1 |
87.5 |
Source: National Vital Statistics Reports, Vol. 54, No. 14, April 19, 2006 US Department of Health and Human Services.
The above tables can be used whether you're thinking about retiring young - in your 50s - or if you're thinking about retiring later in life. The way to use these tables is demonstrated in the following example.
Life Expectancy Examples
Let's say you're a 50 year-old white male thinking about your retirement needs. Given your age, gender, and race you can expect to live for another 28.7 years. That means you your life expectancy is around the age of 79.
Another way to use this table is demonstrated by this second example. Let's say you're a black female that expect to retire at age 65. At that point in your life you can expect to live for another 18.3 years or roughly to age 83.
We're going to revisit these tables later on when we expand our example to include lifetime retirement income calculations.
Retirement Income
Now that we've got a better understanding of life expectancy, it's time to talk a little bit about retirement income needs. The most common rule-of-thumb is the generalization:
In retirement, you'll need to replace 70 - 80% of your pre-retirement income.
This rule-of-thumb is based on the hypothesis that most retirees will not have the same level of financial obligations in retirement than they'll have before they retire - and for many Americans that's true.
Most retirees don't have to worry about paying for college or weddings - two pretty expensive life events. In addition, most of us entering our retirement years have worked hard to pay off our mortgage. Finally, when we're retired we're no longer putting money away each year for retirement - we're already there!
These are some pretty compelling arguments that suggest our retirement income can be lower than our pre-retirement income levels without lowering our standard of living. So just maybe the rule-of-thumb mentioned above is a better guide than most think and can be helpful in predicting retirement income needs.
Retirement Income Calculations
If you don't think the above rule-of-thumb is going to apply to your situation, then you're going to have to go through a series of fairly detailed calculations to figure out an exact replacement amount. The most logical way to go about this is by building a household budget. If you decide to go this route to try and project your future income needs, then you just need to remember that inflation is going to result in decreased buying power in the future. You'll also need to take some pretty accurate educated guesses including answers to the following questions:
Online Retirement Calculators
If you're interested in running through some quick retirement scenarios then you might want to try some of our online retirement calculators. We've got a couple of calculators tailor-made for this particular topic:
- Retirement Income Calculator - this calculator allows you to enter your current age, planned retirement age, life expectancy, money in retirement accounts and desired retirement income. The output from this calculator includes funds at retirement and whether or not you've got a funding surplus or shortfall.
- Retirement Savings Calculator - in addition to the features of the above calculator, this online tool accommodates pension and Social Security assumptions.
Making Retirement Income Last a Lifetime
As promised, we're going to finish this topic up by providing you with some tips on how to make retirement income last a lifetime.
Tip #1 - Start Saving Early
The most effective way to save for retirement is starting early. Adopting this strategy allows you to maximize the benefit of compounding interest and makes saving for retirement far less financially demanding.
Tip #2 - Create a Retirement Plan
There's a saying "you've got to have a dream to make a dream come true." The same hold true for retirement planning - you've got to have a plan to make your plan come true.
Tip #3 - Delay Retiring
While some of you might find this tip distasteful, it certainly is a very good way to make your retirement funds last longer. By delaying retirement you've got more time to save and you may also qualify for a higher monthly Social Security benefit. It's also arguably the most effective way to make your retirement income last a lifetime.
It's certainly good news that Americans are living longer, but that fact makes it even more imperative that we create plans that will provide enough retirement income to provide us with the quality of life we deserve.
About the Author - Calculating Retirement Income Needs
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