When calculating the amount of income that a client will need in retirement the traditional recommendation is that it should be somewhere around 70% to 80% of his pre-retirement income. However, this is yet another tradition that will likely be challenged by the graying children of the 1960s as they retire, due to their likely increased longevity and their better health in retirement, and by escalating healthcare costs that will not be covered by the rapidly disappearing corporate retiree healthcare benefit.
There's another assumption about retirement that the boomers may challenge--how they choose to spend their time, and thus how much cash they'll need to pass that time. It's highly unlikely that they'll be spending too much time, especially in early retirement, sipping lemonade on the porch. Predicting retirees' income needs with some certainty will as a matter of course have an effect on where you recommend your clients invest their retirement portfolios both in the years prior to the onset of retirement, and afterward.
That was what Sun Life Financial hoped to discern through an online survey conducted early this year of 2,000 geographically disparate boomers--about half of whom were already retired, and half not. The respondents were age 50 or over, had at least $250,000 in invested assets, and were already working with some kind of financial professional. The survey was conducted by Cogent Research from January 8-29.
The major finding from the survey appears to be that income needs in retirement fluctuate greatly, depending on the lifestyle adopted by the retiree. "The traditional thinking in retirement is that you would retire and that either through necessity or because of your anticipated lifestyle, that you would spend less," especially in early retirement, notes David Byrnes, a Sun Life executive VP. The thinking was that because "you don't know how long you will be living, the concern would be running out of money in retirement, and based on inflation alone, you'd need more spending dollars down the road," Byrnes says. In the Sun Life survey, however, "Respondents came back with the opposite," says Byrnes: In retirement, like in nearly every other venture you get involved in--like moving to a new location, or starting a new job--spending actually increases early on." Since the survey focused on baby boomers, who have become accustomed to the good life pre-retirement, they'll "want to spend money--and they do so in early retirement. Many anticipate buying second homes, traveling, buying things for their grandchildren."
Byrnes says that internally they call it the "Saturday Syndrome," since just as when you're working, "you probably spend more money on Saturdays than during the work week, because you have the time on your hands. When you first retire, you've got nothing but time on your hands." Mix that reality with the fact that this breed of retirees will be more physically vibrant than their parents, and "they'll want to do more things when they're younger."
That need to stay active is what will drive the boomers in retirement, suggests Byrnes. The survey didn't address another looming income need in retirement--healthcare--but it did note that 81% of those surveyed plan on beginning a new career within the first five years of retirement, while 76% plan on starting a business in those early years.
There's another finding that should be music to the ears of companies like Sun Life Financial that sell flexible variable annuities that provide income but with inflation riders and other features that can increase income when necessary and on demand. The boomer respondents want guaranteed income, but also want to be table to turn on the tap (or off) as their income needs fluctuate.