A recent report by the Congressional Budget Office outlines a variety of the current methods used for measuring the adequacy of retirement income. So, which ones do NAPA Net readers rely upon?
The most common gauge – cited by 81% of this week’s respondents – was a percentage of pre-retirement income, but (more than one response was permitted) an actual retirement income needs projection wasn’t far behind (76%). A multiple of income was a distant (19%) third, and a gap analysis was cited by several, and others employed a variety of approaches. “Depends on their age,” explained one reader. “A percentage of pre-retirement income for those under age 55. Otherwise, a full retirement income needs projection.”
But if the gap wasn’t much in total, when asked to name the primary target, the percentage of pre-retirement income choice enjoyed a clear advantage – 57%, compared with 38% for a retirement income needs projection. The rest (about 5%) used a multiple of income.
Percentage ‘Picks’
Among those who used pre-retirement income, more than one in five (21%) used 75%, with approximately 16% each using 80% or 85%. About 11% used 70%, and about 5% each noted 90% and 100%. But a plurality (23%) said it depended on the age/income of the participant. “Mainly depends on income,” one reader noted. “100% for low earners, grading down to 70% or less for high earners.”
When it comes to relying on a multiple of income, about a third (31%) of this week’s respondents said they relied on 10 times income, and about 8% said “20 times.” But the vast majority (62%) said it depended on the age/income of the participant.
As for those retirement income projections, we asked readers to share which one(s) they used. As you might expect, a wide variety were cited. That said, there was a strong emphasis on using the online tool(s) that were integrated with or provided by the recordkeeper. As one said, “Calculators are all over the table. Best to work with the conditions of the participant and their realistic vision of retirement.”
“Multiple calculators are used!” said another. “A simple Excel spreadsheet is also used for simplicity when a cash-flow analysis is not needed or desired.”
Reader Comments
And, of course, we got a number of reader comments on the subject. Here’s a sampling.
- “It is a very personal discussion, and every participant is different. Although a 75-85% income replacement is the industry norm, it truly depends on the participant's situation – will they have a mortgage in retirement, is there an age gap between spouses, is there an ongoing responsibility for others (parents and/or kids), what is their current quality of health, etc. The challenge is that most participants have not put pen to paper to really determine what income they will need in retirement This is where there is a tremendous opportunity for us to help educate and guide participants to a more realistic number that is beyond a simple income replacement percentage.”
- “More and more we find participants cannot relate to a multiple of salary or even a replacement ration. The only method we find has an impact on participant behaviors is to forecast their current scenario and work with them on the decumulation side with a budget and assumptions to determine if and when they can retire with confidence.”
- “The real question is, ‘What is retirement?’ Having choices and the willingness to live within those choices and not being forced to do something not self-imposed. My prediction is that the idea of retirement will morph from a specific time to a continuum of a lifestyle path begun before age 50.”
- “Longevity is often the most overlooked component; as families are gathering for the holidays, we encourage participants to find out about the family ancestors and the lifespan of those family members to get an idea of their own longevity.”
- “I sit down with participants and spouses and look at current income but also budgets and health issues and trending costs. I then help them see where they need to be and if they cannot reach it how they will pull back... it’s not just plug and play :)”
Thanks to everyone who participated in our weekly NAPA Net Reader Poll!
