How do you know when enough is ENOUGH?

How do you determine what will be enough income in retirement for your clients? To answer this questions, we need to look at replacement ratio theories and apply them to today's economic environment.


According to Dave Littell at the American College of Financial Services: 

– 60% of clients said that they did not have an idea what it would take to provide income for them

- 55% of clients felt their advisors did a good job of counseling them on accumulation BUT

- Only 40% of clients said their advisors did a good job of counseling them on income

So how do we ensure that we are the advisors doing a GOOD job counseling clients on income? What principals are we using to determine what is an adequate amount of retirement income?

Before we try to find an amount of income that will create a similar lifestyle to what the client had PRE retirement, we need to ensure that we can meet necessary expenses including uninsured medical costs.

A retirement income replacement ratio refers to how much income a client has to work with post – retirement as a percentage of how much they had pre – retirement. The classic approach to replacement ratios has been the industry standard for decades and is anywhere between 70-85%.

For example, if your client made $100,000 before retirement, they would need $70,000 - $85,000 in their retirement years to live comfortably and meet expenses.

This assumes that taxes will go down for retirees, Social Security is partially or fully tax free, there is no longer a need to save, and other expenses, like work expenses, go away.  This is an oversimplistic and inappropriate way to approach such an IMPORTANT part of building a plan.

The traditional calculation DOES NOT include:

-          Uninsured medical expenses

-          Catastrophic events – like landing in a nursing home

And when you compound that with other threats to a retirement income plan….

-          Longevity risk

-          Inflation risk – or purchasing power risk

-          Health care cost risk

-          Investment risk

-          Sequence of returns risk

….. a 70-85% income replacement ratio is not going to cut it in 2018.

In fact, that number increases EXPONENTIALLY.

Real Replacement Rates required YEAR ONE of retirement:

Male, Age 65, high income: 

To be 50% sure of covering expenses: 52% replacement rate

To be 90% sure of covering expenses: 119% replacement rate

Female, age 65, high income

To be 50% sure of covering expenses: 59% replacement rate

To be 90% sure of covering expenses: 129% replacement rate

.... And the numbers for your lower – middle income clients are even worse.

Please contact me if you are having a hard time meeting a higher replacement ratio for your clients. There are several strategies you can use (and we can help you with) to get your clients to a comfortable retirement income value.

My Email:
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Here is a link to the ERBI 2013 Study and the complete findings: