When you’re a retired employee and not receiving a monthly income, you need to consider any replacement of the income that your employer used to pay you. When planning for your retirement goal, you need to calculate the replacement income because most people’s spending rate changes in retirement.
Sadly, few people are realistic when estimating the amount of their pre-retirement income they’ll need to invest in life in their later years. This can be a big problem because if you are not planning properly and start living your life on an unrealistic budget, you may find yourself struggling with financial crises too quickly.
The biggest mistakes current employees are making
According to research done by the Transamerica Center for Retirement Studies, the average amount of pre-retirement income most workers think they will need to replace is 67%.
But what we must mention here is that these workers are going to be in big trouble. The reason is that the rate of expenses doesn’t change even if they leave the workforce. Experts recommend that people save at least 70% to 85% of the pre-retirement income to protect themselves from a considerable decline in their lifestyle.
This means, even if they can plan a significant budget cut if they are still replacing only 67% of pre-retirement income, they are likely to see a financial problem in the future. The fact is that you will need more money after retirement rather than less. More than half of retirees increase their pre-retirement spending in the first two years of retirement, and one third continue to spend more than what they used to: 30% more on their household, 120% more in general during the first two years, and close to 25% more six years after retiring.
So, if you plan to replace only 67% of your pre-retirement salary and spend 120% or more, you’re going to see a significant financial drop. There are chances that soon, you will start depending on your retirement nest egg because you didn’t plan for the overspending. Consequently, you’ll be looking at real financial trouble as your nest egg rapidly begins to deplete.
Instead of changing yourself for the short-term, apply a realistic approach. You need to replace about 80% of your pre-retirement salary, but if you want to be extra safe, you can start early and create a retirement savings goal to save enough for your retirement.
Don’t underestimate retirement savings.
Not understanding the actual amount you need to replace in retirement could have a devastating impact on your long-term security. Remember, it’s always better to replace more of your pre-retirement income than to see a shortage of income. That way, you can save more and have more money in your retirement account- which will put you in a good financial condition.
