How Much Income Would You Need to Retire?
11 December 2017
One of the important questions pre-retirees face is how much they will actually spend when they eventually retire. Most financial advisers and planners would give a quote ranging from two-thirds of their pre-retirement expenses to 100%, depending on the lifetstyle they wish to maintain post-retirement. This is an important figure, as it determines our retirement savings goal and how much we need to accumulate through savings and investments while we are still drawing a meaningful income or salary.
In this video, Dimensional Fund Advisors’ Dr Marlena Lee, VP Research, discusses her research on how the income replacement rate at retirement is a function of how much a person earned just prior to retirement. For many individuals out there, we aim to keep the same lifestyle we had enjoyed just prior to retirement. In their study, the replacement rate actually decreased – people tend to spend much less after retirement as some costs go down (less or no taxes to pay, mortgages fully paid, they eat less outside, have more free time to shop around for cheaper deals, etc). The replacement rate for households with higher income also went down significantly more than those with lower income, as there is always a form of minimum spending in the form of utilities, food and other daily necessities. In this video, note that the US 401K can be taken as a proxy of our local CPF payouts, whilst social security is a form of pension scheme.
The video broadly discusses, as a guide, what investors should think about when planning their goals in saving or investing for their retirement.
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