Two key retirement income planning issues that must be considered by each and every client include estimating the level of retirement savings that the client should aim to accumulate and, relatedly, how to withdraw those savings during retirement. Fortunately, the Government Accountability Office (GAO) has released a new study that provides detailed guidance on the first of these issues—which stems from a comprehensive analysis of how a client’s spending patterns can change during retirement based on any number of factors.
Advisors should also be on the lookout for valuable changes that will be coming to the Department of Labor retirement income calculators—changes that will allow clients to implement a modern approach to estimating retirement income needs to more accurately plan for avoiding every client’s worst case scenario: running out of retirement savings.
Retirement Income Replacement: The GAO Study
The GAO study found, unsurprisingly, that there are any number of variables that can impact the level of savings that will be necessary to maintain a particular client’s standard of living during retirement. Further, the study found that current materials provided by the DOL were insufficient to allow clients to accurately estimate that income level.
Variables such as marital status, anticipated changes in spending on household consumption, pre-retirement income demographics and even a client’s desire to travel during retirement were considered in the GAO study. Essentially, the study concluded that there is no “rule of thumb” that will be sufficient to guide every client through the retirement income planning process.
This conclusion led the GAO to make a significant recommendation, with which the DOL agreed: the DOL’s retirement income calculators should contain a mechanism for clients to adjust based on individualized factors that tend to change the estimate of how much money the client will need during retirement. When updated, the tool will now contain options to allow a client to adjust his or her income replacement rate and Social Security replacement rate within an acceptable range, and will also provide examples of how marriage can impact income replacement estimates.
The GAO also recommended that the DOL include new examples of individual circumstances that tend to result in higher or lower income replacement needs—including those based on household characteristics and demographics, as well as those that result from individual choices.
The DOL plans to add additional information and options for adjusting its retirement income calculator by June 2017.
Withdrawal Rates: The Second Estimation