Contrarian data on projected retiree income

[footenote]

In a recent thread we discussed data projecting that those currently 55 - 64 have only $120k in savings. In contrast, Kevin Drum today notes:

"...adjusted for inflation, median household income for retirees is projected to increase from about $20,000 in 1971 to $46,000 in 2041. During that same period, household income of prime-age workers seems likely to stay pretty flat."

http://www.motherjones.com/kevin-drum/2013/11/mint-and-retirement-crisis

Social Security's most recent Modeling Income in the Near Term (MINT) study:

"Despite numerous demographic, economic, and policy changes that have occurred since the early 1990s, the general findings of earlier research... have not changed. Future retirees are projected to have higher incomes and lower poverty rates, and so their prospects look better than current retirees in absolute terms."

[Although SSA adds that current retirees' prospects are worse in relative terms, with percent of replacement income at 84% for current retirees vs 95% for depression era retirees.]

http://www.ssa.gov/policy/docs/ssb/v72n1/v72n1p37.pdf

[dude]

Interesting.

There have been a few people out there poo-pooing the idea that the retirement "crisis" is as bad as some (read: the financial services industry) are making it out to be.  Scott Burns is one (someone here in the MMM forums linked to this article previously, which is how I found it -- he's got a lot of great articles on his blog, btw):

http://assetbuilder.com/scott_burns/surprise!_retirement_may_be_do_able

Certainly this doesn't temper my enthusiasm for saving aggressively to reach FIRE as expeditiously as possible, but hearing something that differs from the usual drumbeat helps me keep things in perspective.

[footenote]

Dude - Great article, thanks for sharing it.

Interesting that Dr. Lee finds 60 - 80% a more realistic target. ("...depending on income level while working" - which I interpret as "lower % if you made more money pre-retirement.") And I did not know that many, including Kotlikoff and Thurow agree with this.  I also found her 95% argument (follow-on article) interesting.

[LalsConstant]

I too concur this is interesting.  I've been personally skeptical that the retirement "crisis" is already here, given that other indicators like the insolvency of Social Security are hotly debated and dates and estimates are decades apart.

I believe a wretched and terrible time is coming (though completely preventable but people are stupid).  We know the weight of SS will crush us eventually, we know most pensions are insolvent, etc. so it's going to cause some serious problems for many at some point but who can say until it actually happens?

[footenote]

Social Security is relatively easy to fix. (Not that it wouldn't take political will and both sides stopping the demagoguery.)

Chained CPI (in effect a cut in benefits) would save $130billion over 10 years according to the Congressional Budget Office. This change alone would extend SS's solvency by 17 years. And raising payroll taxes by 2.5% would keep SS solvent for 75 years. We could also either lift entirely or increase the FICA cap (the point in the year at which high earners no longer pay into SS).

Now Medicare.... that's a much tougher row to hoe...

[Jamesqf]

Interesting that Dr. Lee finds 60 - 80% a more realistic target. ("...depending on income level while working"...

That's something that has long bugged me when reading articles about how much income people need in retirement.  First off, why on Earth does my prior to retirement income matter?  Surely it's my spending that is the important factor?  (For me income varies a lot: in a really good year my spending might be about a third of my after-tax income or less, while in a bad year it might approach 100%.)  And since maybe a third of my current spending is mortgage, which will be paid off around the time I reach standard retirement age, I would need to spend rather less after retirement.

So figuring on 80% of current spending seems perfectly reasonable.

[the fixer]

I think they use the income rule of thumb because it's easier for people to understand. When I was in my mid 20s and first started trying to understand how planning for retirement worked, I read some things about determining spending needs in retirement and thought it was ridiculous. "How am I supposed to know how much money I'll need per year in 40 years?" I would wonder. "I could have a mortgage, medical problems, there could have been a bunch of inflation, who knows?" Then I'd give up.

Of course all of these issues can be addressed with good planning, but no one was explaining it to me in a way I could understand it and have confidence in it. If I got the advice "80% of your last year's income" I would still need to figure out the inflation problem but it would at least be a little simpler.

[frugalman]

The income rule of thumb is prevalent, because most people spend all or more than their income! They just hope you'll slow down a little bit when all you've got is your social security check.

[Jamesqf]

The income rule of thumb is prevalent, because most people spend all or more than their income!

Sure, but my point is that decent retirement advice would point this out, and advise people that cutting back on the spending is both necessary and desireable.

[footenote]

The income rule of thumb is prevalent, because most people spend all or more than their income!

Sure, but my point is that decent retirement advice would point this out, and advise people that cutting back on the spending is both necessary and desireable.

Agree - I was pleased that a recent financial advice column (NBC?) said (finally!) just that.