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By Christine Benz and David Blanchett | 12-09-2013 06:00 AM

Three Main Variables in the Retirement Cost Equation

New research from Morningstar Investment Management examines the key factors that drive income replacement rates, trends in retirement spending, and the duration of retirement.

Christine Benz: Hi, I'm Christine Benz for

One of the many complicated aspects of retirement planning is figuring out how much of your preretirement income you'll need to replace during retirement.

Joining me to discuss some research on this topic is David Blanchett. He's head of retirement research for Morningstar Investment Management.

David, thank you so much for being here.

David Blanchett: Thanks for having me.

Benz: David, this is really a complicated issue. A lot of people use what's called the 80% rule as a starting point for figuring out their income replacement rate, but you really took a comprehensive look at this issue of income replacement.

Let's talk about the variables that you think are crucial to get your arms around when you're attempting to do some planning.

Blanchett: The moral of the story is, one size does not fit all. This is a very complex process to figure out how much someone needs, but there are three main variables to think about when estimating the cost of the retirement.

The first is, as you mentioned, the replacement rate: How much do you need to replace of your preretirement pay when you retire?

The second is, how does that need change over time? The most common assumption is that individuals have the initial need increased by inflation. So if you spend $40,000 in the first year, and inflation is 3%, you spend $41,200 in the second year, and so on.

The third assumption is, how long retirement lasts. People commonly use 30 or 35 years as the retirement period, but that actually varies, as each assumption does, by each individual retiree.

Benz: You found in terms of income replacement rate, there's a huge variation there. 80% does not fit all [people]. You've found that for some people it could be as low as 54%.

Blanchett: Or lower.

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