Question: Is there a formula to figure out how much we need to have a moderate retirement?

Is there a formula that can predict the amount needed if you're planning to have a moderate retirement? And I assume moderate because we're not planning to travel the world, buy a bigger house or two super cars. Last question, is it unrealistic to assume that expenses will decrease when you're 60-plus? I ask because I see my in-laws which don't have a mortgage, no kids in college, and their only expenses are food, utilities, gas and a few vacations during the year. - Jose, Ohio

Response:

There are various rules of thumb that can give you a snapshot, an idea of how much you need to have in retirement. The closer you get to retirement the more you can take advantage of more detailed financial planning programs, such as those at www.analyzenow.com and www.Esplanner.com.  

You make an important point in thinking about retirement. How much you’ll need in retirement depends on your particular life and your particular goals rather than some average vision. Here’s how I made a similar point in a Businessweek story, "No Need to Hit the Panic Button."

Most people find that in the end, their vision of a good retirement is a variation on the life they've lived and the activities they've enjoyed all these years. "If you're given to T-shirts and blue jeans, you won't want to hang out at the country club," says Ross Levin, president of Accredited Investors, a financial planning firm in Edina, Minn. Adds Carl Goodin, a certified financial planner at Financial Planning Associates Inc. in Chesterfield, Mo.: "I have clients who have planned and retired comfortably on an amount of money that, for another client, would hardly pay the country club dues."

That said, is there a formula that gives you a sense of how you’re doing? Fidelity offers a savings-and-salary rule of thumb for a decent retirement. Briefly, the Fidelity rule is the typical worker should have saved about three years worth of salary at age 45, five times at age 55 and eight times by retirement, age 67. (You can read about the rule of thumb in detail here: https://guidance.fidelity.com/viewpoints-workplace/how-much-do-you-need-2)

A similar gauge was devised by Brett Hammond, formerly chief investment strategist at TIAA-CREF. He figures if you’re 35 and plan to retire at 65, you’ll need 2.1 times your salary to be on track. By 45, you should have 3.6 times. At 55, the multiple rises to 5.4 times. And by the time you retire at age 65, you'll want it to be 7.7 times. (The reasoning is laid out here: http://www.tiaa-crefinstitute.org/pdf/research/research_dialogue/rd_assetsalaryratio1209a.pdf)

Although these measures are similar, they differ in a number of critical assumptions. For example, Fidelity assumes a goal of an 85 percent income replacement ratio while Hammond uses a 70 percent ratio. The replacement ratio is how much of your pre-retirement income you’ll need to maintain your standard of living during your retirement years. The typical assumption is that you won’t need 100 percent since you won’t have costs typically associated with going to work, such as regular dry cleaning bills. Your tax burden is likely to be less. You’ll have the time to take advantage of deals and cook dinner more often.

The replacement ratio gets to your second question: will your expenses decrease after 60-plus? The honest answer is “it all depends.” First of all, what do you want to do in retirement? I know people who travel overseas and around the country. They’re determined to visit parts of the world while their health is good and spend time with their children and grandchildren scattered all over the country. Their expenses are up. I know other retirees that love to bike, hike and canoe and their children and grandchildren are in the same town (even neighborhood). Their expenses are down. Both sets of retirees are doing well, but their expenditures are different.

Secondly, a big question mark about future expenditures is health. As we age we spend more on medical care, but some folks end up with relatively small bills and others spend much of their elder years with doctors.

So, I look at these ratios as a ballpark guesstimates to see how well you’re saving for old age while taking a break at work or at home. It’s a quick glance at a much deeper financial planning issue. But it’s a start.

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