Saving for retirement is easy compared with figuring out how much you will need when you retire, which is why TDFs have become so popular. Though using a single investment strategy for people born within the same 5-year window may seem crude, the reality is that how much you differ and the fees that are paid are more important than the nuances of the glide path. But trying to figure out how much you need takes much more analysis. David Blanchett, Morningstar’s head of retirement research, attempts to tackle this issue in a new white paper.
The three assumptions people need to make going into retirement include:
• Replacement rate
• Consumption levels
• Retirement period
Easier said than done. Blanchett takes on some common assumptions we make — for example, that expenses increase by a static percentage and that all expenses increase at the same rate of inflation — and estimates that replacement ratios can vary from 54% to 87% depending on various factors. Other findings based on analysis of data from different sources include the fact that households with lower levels of consumption and higher levels of funding tend to increase their spending in retirement.
The “set it and forget it” model used effectively to accumulate assets when working may not work when planning how to spend in retirement without running out of money. The Morningstar research is a good start for plan advisors who want to be able to do more than say to all clients that they should plan on an 80% replacement ratio. Echoing that opinion is Chris Carosa in a recent article about the 80% figure.
