Preparing for Lifetime Income Sufficiency in Retirement

Sheila Willis |


Back in the 1970s and 1980s when financial planners first began to calculate retirement income needs, many of them latched on to the “70 percent” rule, which says that retirees should plan on needing just 70 percent of their pre-retirement income to live comfortably in retirement. It’s a straightforward rule with assumptions that probably worked well back then, but are dangerously flawed in today’s “new normal” retirement.  The “cost” of retirement has increased significantly in the last three decades to the point where many retirees may need as much as 100 percent of their pre-retirement income.  Planning for lifetime income sufficiency in today’s environment needs to focus less on archaic rules and formulas, and much more on today’s realities.

Perhaps the biggest reason has to do with life expectancy, something that continues to expand each day.  A healthy 65-year old male today can expect to live until age 81. When he turns age 70, he can expect to live until age 85, and will have a 25 percent chance of living to age 100. The risk is compounded further when traditional planning assumptions use standard life expectancy tables to calculate a person’s retirement income need.  Many financial planners and retirement calculators still assume that we will all die on time which means we will run out of money the day after we die. But what if we don’t?

Ensuring your retirement income lasts requires deliberate and thoughtful preparation guided by these essential steps:

  • Clearly and Realistically Define Your Retirement Needs:  With the cost of retirement increasing, it is more important than ever to have a clear, realistic vision of what retirement will look like and be able translate your vision into very specific goals in terms of income need and time horizon. If you don’t have a clear target to aim for, you are most likely not to hit it. Over time, your vision is likely to change, which will require adjustment of your retirement savings objective; so your plan should be reviewed regularly. 
  • Know Your Retirement Costs:  Whatever your retirement vision, it will have a cost. Many people try to estimate retirement costs based on some general rule of thumb (i.e. 70 percent rule), but if you’re concerned about outliving your income, you should take a more deliberate approach to calculating your costs. Create a budget today that reflects your vision.
  • Don’t Invest Too Conservatively:  In today’s environment, the biggest mistake pre-retirees and retirees can make is to invest too conservatively. While you may feel seemingly safe in guaranteed or "safe" investment vehicles, your assets are exposed to a number of other risks, such as inflation.  With the possibility of living 30 years or more in retirement, it is essential to invest to maintain your purchasing power and ensure your that income outlives you.  A well-conceived investment strategy consisting of a broadly diversified portfolio of equities, bonds and cash is the best defense against inflation over a prolonged period of time.
  • Consume Like a Retiree:  Whether out of necessity or a desire to simplify their lives, an increasing number of people have “downsized” their working life in retirement. Today’s retirees are moving into smaller homes, driving less expensive cars, and learning the virtues of simplified living. The focus is beginning to shift from “life style” to “quality of life” which can actually produce more sustainable happiness with far less stress. So, why not begin making the transition now, well ahead of your desired retirement date? In doing so, you’ll not only have more excess cash to invest for retirement, you’ll experience a much easier and more seamless transition into your golden years.

It would be a mistake to succumb to a standard formula or a generalized approach for retirement planning.  Right now, your retirement vision, formed by your own needs, wants, attitudes and beliefs, is your most important benchmark for determining how much money you need to save and how to invest it.  Preparation is the key to retirement success, and the key to being prepared is having a realistic vision, a well thought out plan, an investment strategy and discipline.