They Need to Stay Flexible

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.”