USA TODAY US Edition

Some popular post-work assumption­s are false

Expenses could be lower, but income might be, too

- Robert Powell Columnist USA TODAY

What works in theory doesn’t always work in reality.

And that is certainly the case when it comes to retirement.

Here’s what experts had to say.

❚ Replacemen­t rates differ by income: Experts often say you need to replace 70% of your final earnings in retirement from various sources such as Social Security, personal assets and, for some, earned income.

But 70% is the average. Low-income workers likely need to replace at least 90% of their final earnings (the bulk of which will come from Social Security), middle-income workers need to replace 70% and workers earning the maximum taxable wage,

$128,400 for 2018, may need to replace just 50% of their final earnings.

“I think the 70% to 80% heuristic that is often quoted is an example of why using the average is sometimes flawed,” says Michael Guillemett­e, an assistant professor at Texas Tech University. “Retirees should base the replacemen­t rate off their expenses and goals.”

❚ Income needs drop during retirement: Experts tend to think expenses rise in retirement. Now, it’s true the cost of living rises in retirement because of inflation. And the cost of some items — health care, for instance — rises faster than other items, such as apparel.

But it’s also likely you will spend less on housing, transporta­tion and food.

Consider: According to the Bureau of Labor Statistics’ Consumer Expenditur­e Survey, expenses decline on average from $55,892 for those ages 55 to 64 to

$46,757 for those ages 65 to 74 and to

$34,382 for those age 75 and older. As you think about planning for retirement expenses, also consider matching your guaranteed sources of income (Social Security, pensions, annuities and the like) against 80% of your expenses in retirement. “Collective­ly, housing, food, transporta­tion and health care represent approximat­ely

80% of expenses,” wrote David Blanchett and Thomas Idzorek, co-authors of a paper published by Morningsta­r Investment Management. “This suggests that 80% of the liability model should consist of safe assets.”

❚ You’re not going to work as long as you think: Workers expect to retire later than retirees actually do, according to the 2018 Retirement Confidence Survey published by the Employee Benefit Research Institute (EBRI). What’s more, workers plan to work in retirement, and two in three expect work for pay to be a major or minor source of income.

The truth: Only half of those who say they want to work are able to do so. The rest leave the workforce due to loss of a job, disability, health care shock and the like, according to EBRI.

“It is important to try to work longer if possible and delay taking Social Security benefits (for as long as possible), but you should develop a backup plan to be ready to retire three to five years before you think you will retire,” says Craig Copeland, a senior research associate at EBRI and co-author of EBRI’s Retirement Confidence Survey.

Copeland also warns that finding desirable jobs can be very difficult.

“Once you have been away from work, it is that much harder to get back into a job,” he says. “Usually, those that work the most in retirement typically go back to work quickly.”

If you plan on working to age 66 and expect to save for retirement until you retire but in fact retire at age 61, as Gal- lup and EBRI surveys suggest, consider — as part of your backup plan — increasing the amount you save now.

❚ Plan on withdrawin­g 3%, not 4%, from your retirement accounts: On paper, experts often say you can withdraw 4% from your retirement portfolio when you first retire and then increase that amount by inflation and have it last for 30 years. If you update the analysis to incorporat­e today’s likely lower-return environmen­t, as well as increasing life expectancy, the safe initial withdrawal rate drops to around 3%.

“A problem with this 4% rule of thumb is that it’s based on historical long-term averages,” Blanchett says. “This isn’t to say 4% isn’t a safe initial withdrawal rate for some retirees since it still can be, it’s just that 4% isn’t nearly as safe as it used to be.”

Copeland also cautions against using the 4% rule for withdrawal­s, but for another reason. “Rules such as the 4% withdrawal rate or only taking the required minimum distributi­on or RMD can easily be ruined by a costly home repair or a major illness,” he says. “These large expenses can change what an individual’s needs are in either taking more money out or trying to service debt that may have been used to cover these expenses.”

Robert Powell is editor of The Street’s Retirement Daily www.retirement.the street.com and contribute­s regularly to USA TODAY. Email Bob at rpowell@allthingsr­etirement.com.

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