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By Morningstar.com | 03-11-2017 10:00 AM

How Much Will You Spend in Retirement?

Retirement Readiness Bootcamp Part 1: We lay out how to estimate the percentage of your salary you'll need to generate each year in retirement.

Jeremy Glaser: Good morning, and welcome to Morningstar's Retirement Readiness Bootcamp. I'm Jeremy Glaser, and throughout today we're going to assess your retirement readiness and answer the question, "Are you ready to retire?" I'll be joined by some experts here in the studio, and we'll also hear from some of the best thinkers in retirement today.

Before we get started, a few quick housekeeping notes. First off, we want to hear from you. So, please ask your questions by submitting them through the player and also join the conversation on social media with #RetireFit on Twitter and Facebook.

Let's talk a little bit about what we're going to cover today. We've really thought about there being six major areas that people need to think about when assessing retirement readiness and those align with our sessions today. So, we'll start off with a look at what your expenses in retirement will be. Then we'll look at income that you can get from guaranteed sources like pensions and Social Security. We'll move on to the income that can come from your portfolio, how to structure that portfolio, the best investments to put in there. And finally, we'll look at what happens if your plan falls a bit short and ways to bridge that gap.

So, let's get started with assessing what kind of expenses you're going to have in retirement. And I'm really pleased to be joined by Maria Bruno. She is a senior retirement strategist at Vanguard. Maria, thanks for being here.

Maria Bruno: Thanks for having me.

Glaser: And Christine Benz. She is our director of personal finance at Morningstar.

Christine Benz: Jeremy, great to be here.

Glaser: So, we before we really dive into it, I just want to talk about the impetus of having this conversation today about retirement readiness. Why did you think that this was kind of an urgent conversation to have today?

Benz: One big tipoff was when I was working through our Portfolio Makeover Week, which we do every year, I noticed a preponderance of questions coming from people who are roughly between the ages of, say, 58 and 63. So many people had questions about how to transition from accumulation to deaccumulation and also a lot of questions about the viability of the portfolios that they had been able to amass so far. So, we really looked at that, and we see from feedback on the website that there's pent-up demand for help in answering those questions. That's why we wanted to do a deep dive for people who are getting close to retirement or perhaps already retired.

Bruno: We see that as well at Vanguard. Usually, when we do events such as this but perhaps on a different scale, we do get a lot of questions from those that are nearing retirement, and I think it's a terrific trend that we're seeing.

Glaser: And of course, if you're a little bit farther away, the earlier you start thinking about your readiness, the more time you have to make course adjustments and to get there. So, let's look at this first question about how much you'll actually need because it can be hard to figure out what you're going to spend next year if you're working, let alone 10, 15 years into retirement. So, generally speaking, Maria, when you think of things, the decline in retirement expenses, the decline in retirement, what are some of the big areas that you'd be focused on?

Bruno: Well, there are a few obvious ones. When you think about the work-related expenses, such as commuting for instance, or maybe wardrobe expenses, those types of things. But you also need to think about payroll taxes as well. So, there are certain elements that will go away once you're retired. And also, retirement savings. So, individuals in their working years attribute a portion of their salary toward retirement savings. So, some of those work-related expenses or savings expenses will go down in retirement.

Glaser: Christine, on the flip side though, not everything is going to go down.

Benz: That's right.

Glaser: You're going to have some bigger expenses. What are some of those factors that could be bigger there?

Benz: The biggest heading that people should keep an eye on is the healthcare-related expenses, and I know we're going to be doing a deeper dive into not just outright healthcare expenses but also long-term care expenses, kind of, a subheading. Those are two categories that may increase as a percentage of household budgets in retirement. And they also, healthcare expenses in particular, may inflate at a higher rate. So, the cost may rise at a higher rate than the general inflation rate. So, a few reasons to keep an eye on that.

On the happy side, you have people with maybe higher travel costs, especially early on in retirement where people have that bucket list and want to start doing some heavy travel. People tell me who are retired that simply having more time they have more opportunities to spend more money. They have leisure time and they are out and about and so dining out, theater and so forth. Those things maybe encroach on their budgets a little bit.

And then another category that I think retirees should keep an eye on is home-related outlays, and I think these tend to be particularly important for older retirees where if they are homeowners and on the hook for some of those home maintenance obligation--so even simple house cleaning but also snow shoveling, lawn maintenance--that category may tick up, not for all retirees of course, but for some retirees that category may tick up as a percentage of household budget as the family wants to stay in the house but needs to do some ongoing maintenance of the house.

Glaser: All-in, it seems like the rule of thumb tends to be about replacing 70%, 80% of your income in retirement. As I mentioned at the top, we're going to hear from some other thought leaders, the first being Michael Kitces, who is going to tell us about if 70%, 80% really is a good starting point.

Kitces: So, we often hear this discussion that when you get to retirement you will need something like a 70% income replacement rate or an 80% income replacement rate. There's been a lot of controversy over the years about whether that's really an accurate reflection of realistic expectations for retirees. So, a lot of people say, like, I basically want to continue my current lifestyle, not 70% or 80% of it. But the reality that we actually find is that estimate of 70% to 80% of preretirement income in retirement is actually a pretty good estimate and here's why.

It's not actually meant to say that you assume to spend 70% or 80% of what you used to spend in retirement. The assumption is literally that you're going to spend about 70% or 80% of your preretirement income. Because when you look at your income, like what you actually earn from your job, there are a couple of quick obvious limitations. Number one, you don't enjoy all that money; Uncle Sam takes some of it, right? A portion goes to taxes, both federal and state income taxes and Social Security taxes. Then there's also a slice that often goes savings, right? There's a portion that we weren't spending because we were actually saving. And then there's a little bit that often actually comes out simply because maybe we don't quite have as much commuting expenses driving to work, maybe we're not buying suits and dresses and the same clothing that we did before.

And so, all those 70% or 80% replacement rules are really meant to get at is, when we take all of your income before retirement and we strip out the taxes, the savings and maybe a moderate slice of work expenses, what's left that the typical person spends. And what we find is, about 70% to 80%. And so, that replacement rate assumption is really nothing more than a true assumption of we're assuming in retirement you're going to spend about what you're spending before retirement.

Glaser: Christine, this is a good rule of thumb, but it probably isn't the end point. At what point can you really sit down with pencil and paper and actually figure out a budget of what you could spend in retirement?

Benz: I would say within a year or two or even earlier as you edge toward retirement, you probably really are starting to get your head around what your actual expenses would be. So, at that point, I think, it does makes sense to sit down and do a version of a budget for your in-retirement years.

And I've seen some budgets that retirees have created, they've shown me. And one thing that I think is really great to do is maybe to look out like 10 years at least and actually forecast some of those lumpier expenses, so you may have a decent idea of your regular outlays, but look forward and say, well, in five years we think we'll need to buy a new car or in maybe within the next 10 years we may have a wedding that we'll be participating in funding. So, look ahead. Try to think about those lumpier outlays and incorporate them into your retirement spending plan. The closer you are to retirement of course, the easier it is to get specific about each of those specific line items.

Glaser: And we have a question here that maybe relates to this, asking that when you read traditional readiness articles, it says you should replace XX percent. That's not a way that they like to think about it. A budget like this could be another way to kind of starting from zero and working your way up could be another way to do that?

Benz: Yeah. Get multiple lenses, get multiple reads on the question. But I do think that going line item by line item as retirement approaches is the way to go. Rules of thumb really don't cut it. You need to look at your own situation and I know we're going to talk about it later on. Income plays a role; life stage plays a role in determining outlays over your retirement horizon.

Glaser: Let's talk about income a little bit because our colleague David Blanchett of Morningstar Investment Management has done some research about wealthier retirees actually may need to replace less of their income. He had this to say about it.

David Blanchett: There are certain reasons that replacement rates vary across household income levels and a key one is just what is your take home today, what is your current tax rate. Households or individuals who have lower income, say, $25,000 or less a year, they aren't usually paying very high taxes today. That results in effectively higher target replacement rates. Part of that too is required savings levels. The households that tend to make higher incomes have to save more for retirement. So, if you look at the spectrum of working it out in terms of what they have to target as replacement, you'll see as high as 90%, 95% for households making, say, $20,000 a year and as low as 50% for households who are making a half million dollars a year saving 30% of their compensation.

Glaser: Maria, I know we're going to talk about Social Security in depth in a little bit, but you do think that Social Security is important factor considering income and your replacement rate, correct?

Bruno: Yes. So, those replacement ratios, which is, how much you are going to want to replace but then also the sources and typically, the two main sources would be Social Security and then portfolio assets and drawing down from that. So, when you--Aon has done some work around this. And while the lower-income earners might have higher replacement ratios, a greater portion of that can be replaced by Social Security. In fact, I think they show that low-income earner up to about two thirds of their replacement could come from Social Security whereas on the flip side, high-income earners, that's probably more along the lines of a third of their replacement comes from Social Security. So, the important point there is, there's a higher savings that's required during the accumulation years to satisfy those replacement ratios.

Glaser: One of the questions that we've received and I know it's something we want to talk about, was on how you think about different life stages of retirement. If you're looking at lengthy retirement in particular, you could have some lumpy spending there. Christine, when you think of your spending through retirement, what's the best way to kind of visualize what that's going to look like? Is it going to even out over time? Is it lumpy? How do you think about it?

Benz: It really depends completely on the retiree, but there has been this slogan in the retirement planning community or a phrase that the first years of retirement are the go-go years followed by the slow-go years, followed by the no-go years. And I think when many of us reflect upon retirees we've known, when I think about my own parents, their trajectory actually did follow that general pattern.

So, I remember at 65 to 75 they were out there travelling, travelling with me and my husband and then slowed down a little bit, some health issues came into the picture, maybe from roughly 75 to 85. And then the post 85 years for them were definitely slower years but higher spending years because we had some long-term care-related outlays during those years.

So, I think, it's a useful framework, certainly not something that will jibe with everyone's experience. We pose this question to our roundtable, which we'll be viewing later on, but our roundtable of actual retirees and asked them if this sort of the pattern they expected. And most of them said, I hope that's not me. We're going to stretch out these go-go years for as long as possible. They were all new retirees. So, I think, it's up to each retiree to kind of get that visualization but also be realistic about how they may slow down later in life and how these healthcare costs could begin to creep up as a percentage of their budgets.

Glaser: We do see that as well when you talk to people that this is kind of the pattern that at least they are considering?

Bruno: Yes, absolutely. And I do think–-and then we'll probably talk more about this throughout the day in terms of this precautionary spending earlier in the years around the potential for long-term care--but it's often a point of conversation with retirees and what their personal view is and then interesting to see how that changes over time as well.

Glaser: This also is a pattern that David Blanchett has found. He calls it the "retirement smile."

Blanchett: One thing I found in my research is this thing that I call the retirement spending smile. What it looks at is how spending differs throughout retirement versus inflation. So, when you think about a smile, it's high early, it's high late and it's low in the middle. What that reflects is, for example, younger retirees, say, someone who's 55 years old, they actually tend to spend more than inflation every year. So, if inflation is this line down the middle of the smile, early retirees, they are spending more than inflation each year.

Middle retirees, between ages, say, 70 and 85, actually spend less than inflation. So, inflation goes up, say, 3%, they only spend 1% more. As you move to late retirement, people that are still alive, they spend a lot more based upon healthcare costs. So, when thinking about what that means for a retiree, it means that how you spend in retirement isn't constant over time. So, you can assume that your costs go up by, say, 2% a year on average, but you won't actually see that average across most households.

Jeremy Glaser: We've kind of danced around this a little bit, this idea of healthcare costs being one of the biggest questions marks. And before we dive into it with us, let's hear from Mark Miller, who is a Morningstar contributor, and he has done a lot of research in this area.

Mark Miller: The major out-of-pocket costs for healthcare in retirement are going to be, number one is health insurance. That's going to be about two thirds where you're paying for premiums for Medicare Part B, which is outpatient services and Medicare Part D, which is for prescription drugs. Ultimately, if you decide to go into Medicare Advantage, that's called Part C and that typically rolls everything up into one premium, but that's going to be a big one. The rest is going to be an odd lot of other out-of-pocket for copays, services that are not covered.

A glaring example of noncovered services actually is dental. Medicare does not cover dental services. And the commercial policies that are available to individuals are not very robust. So, there has actually been some discussion of trying to figure out a way to get dental covered in Medicare, but that's going to be an out-of-pocket expense as well.

The Employee Benefit Research Institute does a periodic study where they try to project average costs of healthcare in retirement and the most recent numbers show that a couple at age 65 with kind of median level drug expenditures would need about $265,000 across retirement to have high certainty, 90% certainty, of having enough. The number is smaller if you want sort of 50-50 odds. They put that at $165,000.

But I should say that the figures can really vary quite a bit by a number of factors. Healthcare costs vary quite a bit by region, they vary by health and longevity. And there, it's a little counterintuitive. You would think that if you're healthier, your expenses will be lower. But actually, the lifetime costs will be higher because you're going to live longer. So, it's more years of spending on health insurance premiums and the like.

Also, higher-income retirees pay more because we have these income-related surcharges on the premiums for Medicare Parts B and D that are quite substantial for people with high levels of income. So, the numbers that I'm giving here are very much average. It's also worth noting that most people underestimate this quite a bit. Once they ask people to estimate what they thought their median cost would be for healthcare in retirement, women guessed $30,000, men guessed $60,000, so way below the averages.

Glaser: Maria, those were some pretty scary numbers looking at having to spend that much on healthcare even with Medicare. But these aren't new expenses we believe. You can't just say that you were spending zero before retirement and then all of a sudden you have this huge chunk?

Bruno: Correct. And I think that's a very important caveat to what Mark had discussed in terms of some of these lump sum figures that are often quoted in terms of what you may need to allocate for healthcare going forward. What's important to remember is that many of us pay for insurance during our working years. There may be employer subsidies, but we are paying out of pocket today. So, these healthcare costs are incremental and I think that's an important thing for individuals as they are preparing to retire remember that it's an incremental cost. And some of those increases could be offset by potentially other decreases that we had talked about in terms of overall expenses. So, it's not necessarily a whole brand new number, but it's an incremental one and that will vary by individuals. I will add though for employees who have very generous employer subsidies toward healthcare, they can expect to pay higher out of pocket as a result of that.

Glaser: This is kind of day-to-day medical care, but one of the big questions that we're getting today from viewers and that I know we've heard is on long-term care that if you do need nursing care later in life, what's the best way to fund that. Christine, what's just kind of big picture the way to think about long-term care? I know there's insurance out there, you can self-fund. What are some of the options?

Benz: I'm not surprised we're getting a lot of questions on this topic. In fact, I do these presentations on kind of my bucket portfolios, portfolio structure. If I even mention long-term care, it's like the whole discussion gets hijacked and goes over to long-term care because people have a serious amount of angst around this issue and they are really facing two not attractive choices.

So, on the one hand, there's this idea of buying long-term care insurance. If you talk to a lot of planners, they would say, do it in many cases. But many pre-retirees have talked to their peers or perhaps have followed this with their parents and know that the long-term care insurance industry has had this history of passing through very high premium increases. So, that's been a tough road to follow for pre-retirees. On the other hand, if you don't purchase some sort of policy, then you're left with a lot of uncertainty, how much to set aside if my goal is to self-fund some of these long-term care costs should they arrive, how should I invest that money, how much should I invest for those costs. So, there is a lot of concern. This is a big unsolved issue for many pre-retiree households.

Glaser: Michael Kitces has done some research on this and we're going to hear his take now.

Kitces: In the later years of retirement we run into a real planning challenge which is the unknown contingency of healthcare-related expenses in the later years. Now, it's true that we can really break these into two categories. The first is medical expenses, so hospitals, doctors visits, prescription drugs, things that fortunately Medicare actually does a pretty good job of covering and narrows the uncertainty of spending pretty well. You may have some $20 or $30 copays kicking in there and occasionally a little bit more of a co-insurance payment, but rarely does the late-stage retiree gets surprised with tens or hundreds or thousands of dollars of medical expenses. It turns out Medicare does a pretty good job.

The second aspect of healthcare expenses in the later years though that are much more of a genuine wild card are what are called long-term care expenses. So, this is not necessarily medical healthcare events, but the chronic illnesses that slow us down and may eventually require us to get either in-home care or in the extreme ultimately transitioning to a nursing home. And unfortunately, those expenses are both very large and very limited in their coverage for Medicare. Medicare will cover some long-term care needs if you're coming directly out of a hospital event, but unfortunately just the slow steady deterioration that our body sometimes go through in the later years generally not covered by Medicare and it can create a substantial expense for the household, anywhere from a couple of thousand dollars a month to as much as $50,000 to $80,000 a year depending on the cost of living and facilities where you live. So, that creates a real challenge for planning in later-stage retirement.

Now, in general, we see two ways to handle this. Number one, is simply to buy long-term care insurance. It often I think gets a bad rap these days because it is expensive and how it's gotten more expensive in recent years, particularly with premium increases. But the irony actually is that there's never been less risk of a premium increase on long-term care insurance than buying it today for the remarkably simple reason that it's already gotten more expensive than it's ever been in the past.

Insurance companies don't need to raise the premiums on policies you buy today because they've already made the policies more expensive upfront. So, sometimes a little bit of sticker shock and we got to quote and find out how much it costs, but actually it's still a very effective way to manage the expenses at the back end. If my choice is a couple of thousand dollars a year starting in my 50s or the possibility of $50,000, $100,000 $250,000 expense in my 80s, managing that exposure early on and stabilizing the costs is very effective.

The second alternative though is we simply have a reserve of retirement assets to cover for it. Now, some people literally set aside special reserves kind of an earmarked allocation in their retirement accounts just to handle future long-term care expenses that might be a $100,000 or $200,000 or $300,000 or even more if you're accustomed to higher standards of living or you're particularly concerned about the risk maybe due to family history.

Others we simply see they'll look out and say, look, I've got this group of retirement assets. The reality is, if I go through a long-term care event, I'm not going to have a lot of my other lifestyle other expenses; I might need to hold on to my house, but we're not exactly doing a lot of travel and eating out and all the other stuff that we might do in a more active retirement lifestyle. And so, I'm going to simply let my retirement portfolio transition from retirement living to long-term care expenses as well.

That frankly we find is a pretty reasonable way to handle it, if you've got a fairly sizable portfolio on the first place and especially when you're on your own. But you have to be very careful if you're dealing with this in a situation with a married couple because the last thing we want to see is the situation where the first spouse's long-term care expenses devastate a retirement portfolio to the extent that the second spouse can't maintain their standard of living, and that's why in married couple situations in particular we still tend to look first and foremost to long-term care insurance as a way to smooth out those costs. It may not necessarily be dramatically cheaper in the long run, years of long-term care premiums do add up, but at least we can turn a big wild-card expense into a known fixed one that's much more manageable.

Glaser: Your long-term care expenses are a big question mark. But inflation is also another one. We just don't know what price levels are going to do. There are some signs. Right now, that inflation is starting to build. Christine, what's the best way for retirees to consider what their inflation rate look like in retirement? How could it differ from their working years?

Benz: I think it's really valuable to customize your inflation rate based on your own consumption basket. Jason Zweig wrote a great column. It was several years ago that I still quote. He talked about this idea of me-flation--that really thinking about your own consumption basket and using that to tailor your portfolio to your own inflationary characteristics.

When we look at kind of the headline areas where retirees may experience inflation a little bit more, healthcare would certainly be at the top of the list and I know we're going to talk about that. But we actually went through a period where healthcare costs inflation was flat-lining or even declining. Now, it appears to be heading back up. Housing costs for retirees who choose to rent versus own maybe another category that would inflate at a higher rate than the general inflation rate.

And then by the same token, retirees may not be able to benefit as much from some areas where we've seen inflation fall back. So, one big category recently is the energy area where because retirees are not spending as much on gas on driving around, they are not having to commute to work, they've benefited less from the lower gas prices than working people have benefited. So, I think, it's important to customize your inflation projections based on your own particular spending circumstances.

Glaser: Maria, have you seen any categories that seem kind of people are maybe surprised that the inflation is higher or is it tend to be what Christine says?

Bruno: No, I would tend to agree and I do think it's personalized. So, there's a couple of pockets just to reinforce what Christine said for individuals who may have high medical expenses, for instance, prescription drugs. They may find that those types of costs could increase more than overall inflation. The other potentially is you talked a little bit about individuals who rent. There's also the homeowners and property taxes and that's very specific and individualized as well too. But in some pockets and during different times that could actually go up much more than inflation as well.

Benz: Great point.

Glaser: Christine, I know we're going to talk more about portfolio construction later. But this maybe does mean--it does makes sense to embed inflation protection into your retirement portfolio versus not just trying to guess what it's going to be also trying to protect yourself?

Benz: Absolutely. So, fixed-rate investments are the natural enemy of inflation--or I should say inflation is the natural enemy of fixed-rate investments. So, you want to think beyond bonds, and I think most retirees clearly already are. But having a healthy component of stocks in a portfolio is certainly one of the best long runways to hedge against inflation risk. You'll have a category in stocks with a pretty good shot at out-earning inflation over time. Treasury inflation-protected securities I would also add to the mix, and they should be a larger part of retirees' tool kits than should be the case for working people. Those would be some of the key areas that I would take a look at when thinking about embedding inflation protection into my portfolio.

Glaser: We're going to hear from Mark Miller on healthcare inflation. But please, we're going to take some questions afterwards. So, if you have any, submit them now so that we can get to them. And here's Mark on inflation.

Miller: One of the troubling things about healthcare in retirement is that inflation, healthcare inflation, is starting to show signs of rising again after a fairly long period where healthcare inflation was quite flat. During the worst parts of the recession in particular healthcare costs were very quiet from an inflation standpoint. Last couple of years we're starting to see some changes there. We're starting to see more upward pressure on Part B premiums. That's kind of a complicated picture because of the way that the premium interacts with the Social Security COLA. But for example, for this year for those who are held harmless in that formula, the premium went up about 4%, but it jumped more than 25% for those who are not held harmless. So, you can see that there's some pressure there.

When you look at the Part D prescription drug program, the same is true. An average plan cost went up more than 5%. But if you look at the top 10 plans, the average was more like 8% or 9% and some went up by double-digit amounts. So, there is some evidence that healthcare cost inflation is resurgent.

Glaser: Let's go ahead and take some questions. We've gotten some good ones in. Let's go back to housing a little bit. We had someone ask about that they have a mortgage right now and that's obviously a big expense in retirement. Does it make sense to try to pay that off before retirement, reduce that expense? And how do you think about bringing mortgage debt into retirement?

Bruno: I think I depends. At that point toward the end of the mortgage obviously more of the payments go towards (interest) payments, so there isn't much tax benefit in the later stages of the mortgage. So, it may make sense to try and pay that debt down. It's a balance between paying down the debt and then investing. So, it's a little bit of a trade-off there. I don't think it's necessarily all or nothing, but it's usually a balance.

But generally speaking, a mortgage is one of those situations, especially if you think you're going to stay in the home, I would suggest really focus on trying to pay that debt down, because there are other housing costs that could then go up. Those other maintenance-types of things as Christine had mentioned and the taxes we talked about don't go away and in fact, some of those might actually go up.

Benz: I think it's also important to look at kind of your best return on capital at any given point in time and look at your portfolio and the complexion of your portfolio where you might direct new dollars if you're still accumulating assets. Well, if your bias is to steering more assets to safe securities, really a safer and probably better return on your money would be prepaying that mortgage, especially as you said, Maria, if you plan to stay in the home. If you don't plan to stay in the home, it seems a little grayer. But if you have a very conservative portfolio and your choice is between shoving more money into conservative investments or prepaying the mortgage, my bias would be prepaying the mortgage because even if you have a nice low interest rate, you're going to be very hard pressed to out-earn that interest rate by investing in safe securities today.

Glaser: That actually takes us to our next question about if you do want to relocate or if you do want to downsize in retirement, kind of what is the best time to do that? How do you factor in the expenses that could be associated with downsizing? Is that something you hear a lot of retirees wanting to do?

Benz: I think it is, and I would say the time to consider it, it seems like a strictly personal decision. But certainly, any time you are thinking clearing out a house, selling a house, the younger the better versus trying to tackle such a job later in your retirement tenure. So, I would tackle it sooner rather than later. But I do think that downsizing is an important consideration. It's one that can bring some important financial benefits. So, you may be able to bring some more assets into the kitty, kind of shore-up the retirement plan a little bit. And as Maria alluded to, when I look at retiree budgets, when I think about the retiree budgets that I help manage within my family, those property taxes are a killer on the big homes where the parents raise their kids. If the parents are willing to potentially downsize and get into a smaller house, they can really reduce their ongoing outlays.

Bruno: Yeah, I see the conversation sometimes start when all the kids are out of the house, so the emptiness really starts thinking through in terms of do we really need this large house? It's tough because sometimes they raise their families there and there's this emotional component there. But then they also start to think about as they start to approach retirement, especially living in the Northeast in terms of dealing with the winter, to maybe going somewhere warmer but also more cost-effective. So, those tend to be the trigger points that I see.

Benz: Yeah, the one trade-off--and I'm sure you experience this, Maria--in talking to retirees is, many retirees are really wrestling with this decision of staying near their kids, which is often in the big urban center where there are higher taxes, there are certainly higher housing costs versus maybe going somewhere warm bringing the costs down, and parents are very torn when it comes to that decision. The thing that makes financial sense doesn't make sense when it comes to staying close to their kids and grandkids.

Glaser: I know one of the big gifts my parents gave is that after we all left the house they sold it and cleared it out and got into an apartment kind of early-on, and that was something that probably saved us having to do it down the road. So, that was kind.

Another question we have here on a slightly different track is someone who is farther from retirement, who is 20 years out, how can they even think about what their expenses are going to be? Is it just think about that income replacement rare and assume that's a decent rule of thumb? Is there anything else special that someone that far out could be able to do today?

Bruno: Yeah, I think, obviously the farther out you are from retirement, the more difficult it becomes. I think these replacement ratios can be a good rule of thumb. At Vanguard, we tend to recommend a savings rate of 12% to 15% of your income as a proxy. That includes both employer contributions, any matches for instance, as well as your own particular savings.

So, if you're about 20 years out, I think the general consensus is you need to save more than you probably think you need to and try to stretch yourself as much as possible. We'll probably talk about tax diversification later today in terms of how to invest those dollars. Replacement ratios I think are a good rule of thumb. But at that point, it's really more focus on the savings. As you start to get closer 10, five years closer to retirement, that's when I think the real serious number-crunching comes into play.

Benz: Right. And other thing I would say is, all these retirement calculators online, some of them good, some of them not so good, but experiment with several of them, and you can start this at any life stage. You don't have to wait until you are right about to retire. You should start earlier. See if you are getting some messages on how your savings rate looks, what your investment positioning looks like and take those to heart, especially if you see some recurrent themes like we think you need to step up savings rate or we think you're being too conservative or whatever the message might be.

Bruno: Yeah, and at that point too, I think, it's a little difficult for the household because you're also probably looking toward paying the college tuition bills as well. So, there's this pool in terms of wanting to send the children to college and help subsidize that but then also focus on retirement. And there's limited resources obviously to allocate to those two different goals, but retirement should be a priority. There are loans and certain financial aid opportunities that could be explored with college. So, again, individualized, but the rule of thumb would be to prioritize retirement first.

Glaser: Christine, would you agree with that, that college savings maybe should take a backseat to retirement?

Benz: Absolutely. And here's another, I would say, area where the financial really fights with the emotional that you have a lot of parents who--we all know the value of education and how far it can get one in life. So, parents are very much juggling those competing financial priorities. They don't take kindly to the directive that they should not put college savings front and center. But truly, as Maria said, you'll have more levers if your child gets close to college and you haven't been able to save enough, he or she could work during school or explore a community college for a part of the university years. So, there are more options for families who are hurdling toward college and it looks like they will come up short versus what you'll have if you're getting close to retirement and you haven't saved enough.

Glaser: We have three questions here about married couples where one of the spouses is older than the other. Just any particular subjects or couples where the husband is 15 years older, when you talk about long-term care being don't deplete the entire retirement kitty for a long-term care. Anything else you should keep in mind if there is that age gap?

Benz: I think planning for the longest time horizon is really key in terms of when you're looking at the portfolio's viability, will it last, what should our spending rate look like? You need to plan for that younger spouse's time horizon, do some forecasting around that. Use that to inform your investment positioning. So, the time horizon for the older spouse and the positioning if he or she were a single person is very different than would be the case where you have someone with much younger age.

Bruno: And I think the conversations there start sooner. Because when you have couples that are different ages, you really need to talk through what retirement really means because the two spouses might have very different goals in terms of when they retire. So, if the elder spouse wants to retire at certain point, the younger spouse may not want to do that yet. So, it's really having that discussion in terms of what retirement is and when and then plan toward that. I do think as you get into retirement, things like when to claim Social Security, there's financial implications there. That need to be thought through before you actually go ahead and take the Social Security decision. And then also thinking through the later years in terms of long-term care because the focus should be on both spouses and the concern generally is that one spouse may need a lot of long-term care and that may deplete the assets for the surviving spouse. So, you need to think through that very carefully.

Glaser: Maria, I actually have a quick follow-up to your rule of thumb on saving and the question is, is that a gross income or is it your net take home pay that you should be targeting that savings rate?

Bruno: Generally, gross income is a good target. And again, I mean, that number can be, especially for younger investors, it can be a little bit of a shock factor. The message there is to get there in a disciplined way, increase your target percentage every year. And fortunately, through 401(k) savings you can do that in a disciplined way through automatic increases and it does include any employer matches as well too.

Glaser: We have a question from an expat who is planning on moving back to the U.S. for retirement and another housing question. Does it make sense to buy a house when you come back if you don't own one now? Is not having a house in retirement a problem? Is it something that should concern you from an expense standpoint?

Benz: Not necessarily, I wouldn't say. I think, again, here's probably a place where I would let personal lifestyle factors be as influential as financial factors because it's not a bright line that yes everyone should be a homeowner in retirement. As we have talked about, there are caring and maintenance costs associated with being a homeowner. So, even if you're not experiencing rental inflation, you may still have outlays related to that house. So, it seems like a personal decision and I think it also very much depends on your thoughts about staying put in a single place versus potentially being willing to entertain other options. If you have a shorter time horizon for homeownership, that becomes a riskier decision. You could be--the time that you want to sell that home could be an unforgiving market for selling that house. So, I think that you need to factor that in as well that idiosyncratic risk of trying to sell a home is something to be mindful of.

Glaser: We have time for one last question. This one on charitable giving. If you're thinking about giving significant amount of money to charity, does it matter when you plan that in retirement? Is that something you'd want to do early? Is it something you'd want to maybe just bequest? How do you think about charitable giving in retirement?

Bruno: For higher-net-worth individuals, I think, it's a little bit clear in terms of the ability to go ahead and do lifetime giving. Usually, when we see planning and spending strategies, we usually will see later in life increases due to healthcare as well as bequests. So, usually, there may be planning there, there may be allocation decisions to how to invest that bucket of money but the actual bequest may not happen until later in life just to have the security there for the retirement years. So, it depends. It depends on how you give. There's tax benefits certainly. But I think it needs to be balanced in terms of sustainability as well as giving.

Benz: Yeah, I like that point a lot, Maria. I guess another factor in the mix though is that with retirees I have talked to, including our roundtable that we did, there is a lot of emotional gratification from being someone who--especially if you feel like you've saved well and managed your financial assets well to be able to be financially helpful. So, I think, it is a balancing act, but you do have to have your eye on that overall portfolio sustainability at the end of the day.

Glaser: Let's go ahead and take a look at some of the key takeaways from this session.

Really, the first is that, your in-retirement income needs are going to be lower than they are when you're working. We talked about some of the swing factors. Also, that if you're a more affluent retiree, you may have to save a smaller percentage there. Retirement spending is rarely a straight line. Remember that "retirement smile" when you're doing your planning. And finally, long-term insurance is something that really could be critical and that you should consider.

So, Christine and Maria, thank you so much for joining me. We'll be back in our next session in just 10 minutes to talk about some of those guaranteed sources of income. We also have a workbook that's available for you to download in the player. It has some worksheets that can help you both through this session and through the other sessions to plan your own retirement.

Thanks for joining us.

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