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Uncle Sam Talks Retirement Income

By Tom Foster

So how much income in retirement is enough? Uncle Sam, after studying how different households spend their money, has weighed in on this complex issue, offering new guidance to pre-retirees.

The conclusions reinforce the approaches that many financial advisors rely on to help their clients determine their income needs and readiness for retirement. To a large extent, how much income workers need in retirement depends to a large extent on whether they spend their money like Ebenezer Scrooge or the crew from “McHale’s Navy” on leave – or something in between.

The United States Government Accountability Office (GAO), in a recently published report1, is recommending that the Department of Labor (DOL) provide additional guidance and examples for income replacement rates for retirees. The GAO is also urging the DOL to sharpen its planning tools to allow pre-retirees to adjust current recommendations on replacement rates to better fit their financial needs.

In studying the income issue, the GAO determined that the financial services industry typically recommends replacement rates of between 70 percent and 85 percent of a pre-retiree’s salary. But some “financial industry professionals” – otherwise known as financial advisors – told the GAO that they develop customized target replacement rates that take into account workers’ assets and expected spending. Some advisors even questioned the usefulness of replacement rates.

One of the most useful methods that advisors rely on to determine their clients’ retirement income needs is a gap analysis. The analysis takes into account a pre-retiree’s spending habits and what lifestyle he or she envisions in retirement.

Among the key considerations should be whether the client will have to continue paying a mortgage, rent or condo fees in retirement, projected medical expenses, taxes, insurance, lifestyle considerations such as travel, hobbies and charitable giving, support for adult children, grandchildren or other relatives, and a myriad of other individual spending choices.

Next, the advisors review sources of retirement income, including whether the client will have a pension, cash balance plan, annuity or other guaranteed income, Social Security and, of course, retirement savings. Any difference (shortfall) between their income and projected expenses constitutes a “gap” that they will have to close before being able to retire.

The GAO study raises some additional considerations. For instance, the GAO noted a debate among financial professionals over whether households that have raised children can rely on a lower replacement income rate compared to households that have not. Those households who have experienced the phenomenon of “boomerang children,” adult children who have moved back home for financial reasons, might wave a warning flag.

Another debate: should a worker’s pre-retirement income be defined as earnings at the end of his or her career or average earnings over the course of his or her career.

Other complications abound. While the GAO found that household expenses typically account for the largest share of spending regardless of age, older households typically spend more on health care than mid-career households. Fidelity estimates that a 65-year-old couple can expect to spend an average of $275,000 for medical expenses in retirement, including insurance premiums and out-of-pocket costs2. The relative health of a pre-retiree is an important variable in this equation.

Age is another consideration. Average spending by “young retiree” households (ages 65-69) was typically less than mid-career households (ages 45-49), according to the GAO. However, there was not a significant difference in spending between those same categories among households in the lowest income quartile. Meanwhile, older households spent $20,000 less than younger households in the highest income quartile, the GAO report noted.

Providers of 401(k) and other defined contribution plans often recommend that plan participants rely on different replacement rates as a rule of thumb. For instance, MassMutual pegs its “retirement readiness” criteria on the ability of workers to replace 75 percent of their pre-retirement income based on all income sources, including Social Security. However, that target does not obviate the need for a participant to consult an advisor about his or her individual financial situation and needs in retirement.

It seems Uncle Sam is coming to the same conclusion as the number of Americans reaching retirement age or living in retirement climbs ever higher. Approximately 10,000 baby boomers turn age 65 every day, according to the Pew Center for Research3. Many of those boomers can look forward to decades in retirement.

The Social Security Administration reports that a 65-year-old male can expect to live on average to age 84.3 and a 65-year-old female can expect to live on average to age 86.64. That means the typical retirement will last 20 years. With one out of every four 65-year-old living past age 90 and one out of 10 will living past age 95, Social Security projects, many retirements will stretch to 30 years or more.

 Longer retirements put a greater emphasis on the need to take spending into account when projecting retirement income needs. While most people may not want to live like Scrooge in retirement, they need to be realistic about their spending and lifestyle needs and avoid spending like a sailor who just arrived in a new port of call.


E. Thomas Foster Jr. is head of strategic relationships for retirement plans for Massachusetts Mutual Life Insurance Co. (MassMutual).


1Retirement Security, Better Information on Income Replacement Rates Needed to Help Workers Plan for Retirement, United States Government Accountability Office,

 2Health Care Costs for Retirees Rise to an Estimated $275,000 Fidelity Analysis Shows, Fidelity, Aug. 24, 2017,

 3Baby Boomers Retire, Pew Research, Center,

 4Social Security, Life Expectancy,