For years, many advisers have used a rule of thumb that clients, in order to maintain their standard of living in retirement, should invest enough money so that as retirees they can count on receiving for the rest of their lives an income equivalent to about 80% to 85% of pre-retirement income.

Some retirement tools even use a replacement rate of 100% of pre-retirement income as a default goal.

But experts and a growing body of research suggest that these income replacement percentages, especially for middle-income and wealthier individuals and particularly for married couples, are way too high, and may be causing clients to save too much and to live less well before retirement.

Some experts are even questioning the merit of income replacement ratios altogether for retirement planning.

“It’s very hard to generalize and say what percentage of final pre-retirement income a particular retiree should aim for,” says David Blanchett, head of retirement research at Morningstar.

People are retiring at different ages or are continuing to work part-time in retirement, he says.
Couples, too, don’t always retire at the same time. And expenses can go down substantially in retirement if a mortgage is paid off, kids are done with college and taxes are lower, especially with retirees no longer paying a Social Security tax.

Other costs fall, too, such as fewer meals out for non-working retirees, less wear and tear on vehicles — or eventually no vehicle at all in some cases — not to mention, the savings seen from senior discounts on goods and services.

“A 70% income replacement, or even lower, can make sense for many people,” Blanchett says.
But he adds that his research shows that this rate could actually range anywhere from 54% to 87%, depending upon the individual retiree’s situation, with wealthier retirees generally needing a lower replacement than low-income retirees.

“We have just come to the conclusion that retirement income replacement rates are not useful in helping someone who has not yet retired to plan responsibly for retirement with any confidence,” says Jack Vanderhei, director of research at the Washington-based Employee Benefit Research Institute.

Some experts are saying that instead of trying to estimate clients’ pre-retirement income replacement ratio for retirement advisers should have them look at their expenses and decide what those will be during retirement.

“When consumption and funding levels are combined and correctly modeled, the true cost of retirement is highly personalized based on each household’s unique facts and circumstances and is likely to be lower than amounts determined using more traditional models,” Vanderhei says.