The Neutral Retirement Income Target

The previous chapter showed the connection between retirement income and the income you have available for regular consumption before retirement. The more you save for retirement, the less you have left for regular consumption during your working years. Conservatism generally is a good thing where financial matters are concerned but it can be carried too far. When the couple in the last chapter set their retirement target at 70 per cent, they ended up with a very meagre existence in the 35 years preceding their retirement. People generally do not want to deprive themselves throughout their working career just to have a higher level of income in retirement than they'll actually spend.

If 70 per cent isn't the right number, and we want to arrive at a more reasonable retirement target, we can't just pick a number out of the air. The right number has to come with a story. The best story, perhaps, is that we should strive to have enough retirement income to be able to continue the same level of regular consumption that we enjoyed before retirement. This at least is a good starting point; some people will want higher income in retirement while others will expect it to be somewhat lower. We'll call the income target that balances both positions the Neutral Retirement Income Target or NRIT. The NRIT is the retirement income, expressed as a percentage of final pre-retirement gross income, that provides for the same consumption before and after retirement. ...

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