How to Spot Bad Retirement Advice

Few retirement rules of thumb work for everyone.

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If you are 65 years old, about to retire, and expect to spend $40,000 more than your Social Security income each year, you are one of the few people who can follow the expert advice that you need $1 million to retire. For the rest of you, this advice is at best, unhelpful and at worst, dangerous.

The same goes for the conventional wisdom that you will need a nest egg that will provide 80 percent of your pre-retirement income, or any percent of your pre-retirement income for that matter. If the math works out that way for you, it’s largely a coincidence. The real answer to how much of your pre-retirement income you will need in retirement is: It depends.

[See How Much Money Will You Need to Retire?]

Consider a couple who earns $100,000 per year. Let’s assume they currently spend half of that each year. While they expect some expenses to go down in retirement, like commuting costs, they know others, such as health care costs, will go up. They plan to spend $60,000 per year in retirement, or 60 percent of their pre-retirement income.

Another couple that makes exactly the same amount of money each year may be tapping savings, credit cards, or home equity lines to support their lifestyle. To continue the life they are accustomed to in retirement, they may need 110 percent of their pre-retirement income.

The amount you will need for retirement has less to do with how much you earn before retirement than how much of it you spend. Without considering exactly what your retirement budget will look like, you have very little chance of hitting the right savings target.

Historically, a retiree with a well-diversified nest egg worth about 25 times their expected retirement expenses (that are not being met by pensions or Social Security) would have had enough to provide for a 30-year retirement. Does our current sour economy override the historical averages? The historical data includes several recessions as well as the Great Depression, so as a guideline, it’s still a pretty good one.

[See The Good News About Retirement.]

Over the last several years, a lot of retirement advice has moved in the direction of warning against retirement all together, or at least advised putting it off for a few years. Is it still possible to make your retirement dreams come true? It is. And understanding your retirement budget becomes really valuable when you are creating your Plan B.

I retired in 2008, just as the market began its 56 percent decline. This was not the ideal environment for a worry-free retirement. Since nearly one-third of our retirement budget was made up of discretionary expenses such as travel and entertainment, our Plan B included cutting back on some of those expenses while we rode out the storm. On the bright side, the recession brought with it significant decreases to our property tax bills and mortgage payment, which contributed to even leaner spending than we expected in retirement.

[See 10 Tips for Retirement Overseas.]

Even under the best of circumstances, your retirement may hit a few budgetary bumps. If you have a clear picture of your budget, you will be prepared to make some mid-course adjustments to spending. Your Plan B may include picking up some part-time or seasonal work, moving to a lower-cost location, downsizing your home, or taking advantage of a reverse mortgage. But you’ve got to have a retirement budget in place before you can revise it. The next time you hear any retirement planning advice that doesn’t include figuring out exactly how much your individual spending will be, here’s my retirement advice: Ignore it.

Sydney Lagier is a former certified public accountant. Since retiring in 2008 at the age of 44, she has been writing about the transition from productive member of society to gal of leisure at her blog, Retirement: A Full-Time Job.