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How Much Income Do You Need in Retirement?

https://youtu.be/jaqR6fYQ8Oo

00:00:09
how much retirement income is enough is a really important question facing anyone trying to plan for retirement and that answer is well it depends what kind of lifestyle do you want for many the answer is let's just keep the same lifestyle we had right before retirement we started our research by defining what's a replacement rate and that's just what percentage of your pre-retirement income you'll need in order to keep the kind of life you have now others may define the replacement rate differently but this is how we defined it for our study our analysis shows your replacement rate depends on how much you earned right before you retire so let me give you an example before he retires mark earned seventy five thousand dollars per year and out of that gross income he saves for retirement he pays his taxes he spends the rest on mortgage supporting his family and other necessities but when Mark retires he no longer needs to save for retirement his tax rate might be lower his overall spending decreases too because he may have paid off his mortgage and the kids may have moved out he has more time to shop around for a good deal and perhaps cook at home mark might only need 65% of his pre-retirement gross income this decrease in spending is well documented in many studies over the last forty years so when we dug into the data what we found is the spending the clients depend on your income so the steepest declines happen for households with higher income and that directly impacts their replacement rate so let's look at another example melissa earns $100,000 per year before retirement she saves at a higher rate pays more taxes in addition to having more disposable income so when Melissa retires besides spending less the decreases in taxes and savings really add up she may need only about 50% of her pre-retirement income to maintain her lifestyle in our analysis we considered people like Melissa who earned more than $100,000 to be high earners mark falls in the middle earner category with incomes between 50 and $100,000 low earners make less than $50,000 per so when we looked at replacement rates for each income group we found that replacement rates decline with income so in other words the high earners need to replace less than the medium earners who also need to replace less than the low earners for the low earners they might need something like 80% replacement rate and that's because both before and after retirement they're spending more of that income on necessities so once you figure out what replacement rate you need you need to think about how to fund it currently Social Security funds a portion of the replacement rate you can see it has the greatest impact for low earners for high earners like Melissa Social Security makes up less of her replacement income a larger portion of her replacement income will need to come from savings so why is it important for households to think about what replacement rate they'll need while having a goal for retirement is the first step to deciding how much they'll need to save in order to have a successful retirement and this is an individual decision there's not going to be a one-size-fits-all rule that's going to apply to all households so this is a framework to help guide people through making those decisions you you (soft techno music) How much retirement income is enough is a really important question facing anyone trying to plan for retirement, and that answer is, well it depends. What kind of lifestyle do you want? For many, the answer is, let's just keep the same lifestyle we had right before retirement. We started our research by defining, what's a replacement rate? And that's just what percentage of your pre-retirement income you'll need in order to keep the kind of life you have now. Others may define the replcement rate differently, but this is how we defined it for our study. Our analysis shows your replacement rate depends on how much you earned right before you retire. So let me give you an example. Before he retires, Mark earns $75,000 per year. And out of that gross income, he saves for retirement, he pays his taxes, he spends the rest on mortgage, supporting his family, and other necessities. But when Mark retires, he no longer needs to save for retirement. His tax rate might be lower. His overall spending decreases, too. Because he may have paid off his mortgage, and the kids may have moved out. He has more time to shop around for a good deal, and perhaps cook at home.

00:01:13
Mark might only need 65% of his pre-retirement gross income.

00:01:17
This decrease in spending is well documented in many studies over the last 40 years. So when we dug into the data, what we found is these spending declines depend on your income. So the steepest declines happen for households with higher income. And that directly impacts their replacement rate. So let's look at another example.

00:01:34
Melissa earns $100,000 per year before retirement. She saves at a higher rate, pays more taxes, in addition to having more disposable income. So when Melissa retires, besides spending less, the decreases in taxes and savings really add up.

00:01:50
She may need only about 50% of her pre-retirement income to maintain her lifestyle. In our analysys we considered people like Melissa who earn more than $100,000 to be high earners. Mark falls in the middle earner category, with incomes between $50 and $100,000.

00:02:06
Low earners make less than $50,000 per year. So when we looked at replacement rates for each income group we found that replacement rates decline with income. So in other words, the high earners need to replace less than the medium earners, who also need to replace less than the low earners. For the low earners, they might need something like 80% replacement rate, and that's because both before and after retirement, they're spending more of that income on necessities. So once you figure out what replacement rate you need, you need to think about how to fund it. Currently, Social Security funds a portion of the replacement rate. You can see it has the greatest impact for low earners. For high earners, like Melissa, Social Security makes up less of her replacement income. A larger portion of her replacement income will need to come from savings. So why is it important for households to think about what replacement rate they'll need? Well having a goal for retirement is the first step to deciding how much they'll need to save in order to have a successful retirement. And this is an individual decision.

00:03:07
There's not going to be a one size fits all rule that's going to apply to all households. So this is a framework to help guide people through making those decisions.

00:03:16
(slow techno music) So as a plan sponsor, for the first time you're not looking at your participant as one, you're looking at 'em in groups or cohorts. And you can now target various replacement rates as a measure of success for a plan. So by doing that, every single year you can go back and look at what value am I adding, helping my participants save appropriate amount for retirement? And that's really new for most plans today.

00:03:42
Most plans don't look at success of their participants in terms of low, medium, and high earners. This now gives the power back to the plan sponsor. This helps the plan refocus on what matters to participants most, which is their outcome. How much they're gonna save, and how much they're gonna spend in retirement.

00:03:58
(soft techno music)

Source : Youtube

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