Tuesday, February 28, 2012

It's not what you make, it's what you keep

Yesterday, Employee Benefit News (EBN) had a very interesting article that discusses savings and spending patterns that occur post-retirement. You can find the article here.


The study in the article was conducted by EBRI, the Employee Benefit Research Institute. I found a few takeaways very interesting. Specifically, that retired American households tend to spend approx. 80% of their Pre-retirement income, that there is a curve to spending with the earlier years representing a period of higher spending which reduces as people age and that the two biggest costs post-retirement were on housing and healthcare. Noteworthy, healthcare costs rise from as low as 9% to as high as 18% as the person ages.

What I found interesting as well, were some factors that contributed to these statistics. As an example, a retiree doesn't pay FICA taxes, a retiree doesn't contribute to a 401(k) Plan, a retiree drives less and buys less clothing, frankly because they don't work.

Finally, since health deteriorates as one ages, discretionary spending on entertainment, for example, declines as well.

All of the above confirms what the industry is already working towards which is 'The Number' for each person. We, generally, feel that this number is somewhere around 70% income replacement, adjusted for inflation to be funded by social security, 401(k) savings and outside savings. In general, we advocate retiring later as for each year of work, a person gains one more year of savings and one less year of post-retirement financing and one more year of earnings on what they've already saved.

The bottom line from all of the above is, it isn't how much one earns that is of primary importance, but rather that what one earns needs to be larger than what one spends. This is true during our working years and true post-retirement as well.

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