In retirement planning, always a thorny question to deal with is : what level of income will I require in order to maintain my standard of living when I eventually decide to retire? Financial and pensions advisers call this target income the replacement rate, which is expressed as a percentage of income received immediately prior to retirement.
So won’t I need at least as much income in retirement as before? You can count yourself fortunate if you can retire without taking a drop in income. But that you can probably keep up your level of spending on consumption with less income has been put down to the following:
- In retirement most people pay less tax
- For many the cost of saving for retirement stops
- Most households look to have no mortgage left to pay for, or not for long after retirement
At the RETIRE Project at Georgia State University required replacement rates have been studied and calculated for decades. As at 2008, the project estimated that households with earnings of more than $50,000 needed about 80 percent of pre-retirement earnings to maintain the same level of consumption. The Boston College finds achieving this level of earnings depends on the following factors:
- Level of government income support, if any – the higher any supplementary financial support received the lower the retirement income provided by savings needs to be
- Rate of return on savings– the higher this is, the lower the amount needed to be put away as savings
- Age when savings begin– the earlier the start,the less is required to be saved by way of regular contributions
- Age of retirement – the longer this is delayed, the lower the required saving rate needs to be
You can see a summary of the Boston College paper here: “How important is Asset Allocation to Financial Security in Retirement?”
Adjusting any of these factors can make a great deal of difference to the prospective retiree. Starting to save early, and/or delaying retirement can make a significant difference to the outcomes. When retirement planning appropriate professional advice should be taken.