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Why You’ll Need Less in Retirement Than You Think

3 reasons your money will go further, though health care is a wild card


(This article appeared previously on MarketWatch.)

Conventional wisdom says you need retirement income equal to 80 percent of your final salary. But there is a decent chance you could happily retire with far less.

Let’s start with reality: Most of us don’t have a well-honed financial plan in which we set out to amass a specific sum and quit the workforce only when we hit our target. Instead, we save what we can and then make do.
If that means retiring with less than 80 percent, I wouldn’t be overly concerned.

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Consider a 2014 survey of recent retirees by Baltimore’s T. Rowe Price Group. The 1,507 participants, who had a median net worth of $473,000, were living on an average of 66 percent of their preretirement income. Yet 57 percent said they were living as well or better than when they were working and 85 percent agreed with this statement: “I don’t need to spend as much as I did before I retired to be satisfied.”

Why You'll Need Less 
The 80 percent replacement ratio assumes you can get by on less than your final salary because you no longer are saving 10 percent a year or so toward retirement. You also are no longer making an employee’s 7.65 percent payroll-tax contribution to Social Security and Medicare.
In addition, your federal income-tax bill should go down. Those 65 and older can claim a higher standard deduction or, if they are itemizing, can often deduct unreimbursed medical and dental expenses in excess of 7.5 percent of income, versus 10 percent for those who are younger. On top of that, a significant portion of your income will likely come from Social Security benefits, which are partially or entirely tax-free.
Set against these savings is one cost that could rise sharply: health care expenses. This is a wild card, in part because much depends on whether you end up in a nursing home.

(MORE: Planning For the Retirement Wild Card)

All this seems reasonable as far as it goes — but I don’t believe it goes far enough. While some retirees might need 80 percent of their pre-retirement income, here are three reasons you may be comfortable with much less:
1. Your children are off the family payroll
According to the Agriculture Department, it costs $245,000 for a middle-income family to raise a child through age 17. College might add another $100,000 or $200,000, and possibly more, depending on whether your teenager goes to a state or private school. Often, the tab doesn’t end there, as parents subsidize their adult children’s initial years in the workforce.
What happens when those bills are over? Some experts think the parents’ cost of living falls sharply, which means they don’t need nearly as much retirement income. Anthony Webb, a senior research economist at Boston College’s Center for Retirement Research, disagrees. “I don’t think it equates to what people do in the real world,” he argues. “When the kids leave home, instead of consuming less and saving more, the parents spend more. They likely travel more and go to nicer restaurants.”

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It is a shame empty-nesters aren’t seizing the opportunity to save more. But there also is cause for optimism: If the money is getting lavished on travel and eating out, it suggests the parents have a fair amount of financial wiggle room — and they could easily cut expenses if they later find themselves without enough retirement income.
2. You were saving more than 10 percent
In 2014, Americans saved just 4.8 percent of their disposable personal income, on average, according to the Bureau of Economic Analysis. But while many Americans save pitifully little, I meet plenty of folks who regularly sock away 20 percent of their income, and even more once they count any matching employer contribution to their 401(k) plan.
That brings us to one of the great financial ironies: The more you save, the less you need for retirement. If you sock away just 10 percent of your income, you might indeed require 80 percent of your final salary to retire in comfort. But if you save 25 percent, you could sustain your current lifestyle with perhaps 65 percent.
3. Your mortgage is paid off
More people are carrying mortgage debt into retirement; the Federal Reserve’s 2013 Survey of Consumer Finances found that 42 percent of households headed by someone age 65 to 74 have debt that is secured by their home, up from 32 percent in 2004. Many seniors, however, seem to get this debt paid off in their initial retirement years. Among households headed by someone age 75 and older, less than 20 percent have loans secured by their house.
“If you have your mortgage paid off, it might take down the income you need by 10 percent or 15 percent,” says Denver, Colo., financial adviser Charles Farrell, author of Your Money Ratios. “If you have low fixed costs, you could probably retire with a lot less than 80 percent. You might be comfortable at 50 percent or 60 percent.”

Jonathan Clements is the author of the Jonathan Clements Money Guide 2015. This article originally appeared in The Wall Street Journal.

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