What’s the Plan, Betty and Stan?

Periodically in our blogposts we take the time to remind you that in addition to using the Actuarial Approach to help you develop a reasonable spending budget and keep it on track over time, you can also use it to model deviations from assumed future experience.  As discussed in our post of November 26, 2017, modeling deviations from assumed future experience can be valuable in helping you develop a more robust personal financial plan.  It gives you the opportunity to think about what you would do, for example, if:

• Your equity investments suffer a significant loss, 
• Your spouse dies, 
• Your or your spouses’ health deteriorates rapidly, 
• Your children need money, 
• You lose a source of income, or 
• Your house needs significant repairs
  

Will You Really Need to Generate More Lifetime Income in Retirement Than You Think?

Last week, the Wall Street Journal published an article questioning the fairly common rule of thumb recommended by many retirement experts that individuals need to replace about 70% to 80% of their pre-retirement pay in retirement.  The WSJ article, written by Dan Ariely and Aline Holzwarth, was titled, “How Much Money Will You Really Spend in Retirement?  Probably a Lot More Than You Think.”  For those unable to read the WSJ article, you can read a related article in MarketWatch entitled, Retirement is going to cost a lot more than you think—here’s what to do.  The authors of these articles argue that instead of needing to replace 70% to 80% of pre-retirement pay in accordance with the commonly used rule of thumb, you should be looking at funding income replacement of 130% or more of your pre-retirement pay.  This post will respond to these articles.  In summary, even though we are not particularly big fans of using the 70%-80% of pre-retirement pay rule of thumb, we are even less impressed with the authors’ recommended 130% of final pay rule of thumb.