16 January 2018

Retire Comfortably with a Flexible Budget

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Retirement planners say you will need at least 70% of pre-retirement income to enjoy your golden years. Yet recent retirees with less say they are doing just fine. Three years into retirement, the average replacement income of people with an IRA or 401(k) plan is just 66% of final pay, a survey conducted by T. Rowe Price found. Yet more than half say they are living as well or better than when they were working, and 89% say they are somewhat or very satisfied with retirement so far.

Such findings belie our widely accepted retirement savings crisis. The average 50-year-old has put away just $44,000. But clearly a large subset—those with either a 401(k) plan or IRA, or both—are doing pretty well. This is the group surveyed by filtering for those retired less than five years or over 50 and still working.

For years a small band of economists have been making the case that many people are over saving. They argue that the financial services industry is essentially scaring people into over saving in order to collect fees. The fright factor is evident in the T. Rowe Price survey, where those still at work expressed far more anxiety than those who have reached retirement and found it to be less financially challenging than they may have been led to believe.

Recent retirees in the survey have median assets of $473,000. That includes investable assets plus home equity minus debt. Home equity is a big part of their holdings at $191,000. They have just 52% of investable assets in stocks and asset allocation mutual funds, and are playing it fairly safe with 31% in cash.

How are they managing on pre-retirement income that falls short of most planners’ models? A third are working at something or looking for work, and to augment Social Security and pension income they are drawing down their savings by an average of 4% a year, which is a rate that many planners consider reasonable.

The real source of new retiree satisfaction may be their genuine appreciation for a downsized life: 85% say they do not need to spend as much in order to be happy and 65% feel relieved to no longer be trying to keep up with the Joneses. In addition, they embrace flexibility with 60% saying they would rather adjust their spending to maintain their portfolio than maintain their spending at the expense of their portfolio.

Click here to access the full article on CNNMoney.

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