One of the most common rules of thumb regarding retirement income is the replacement ratio—the amount of preretirement income that needs to be replaced in retirement.
Vanguard’s forthcoming research assumes a target replacement ratio of 79%, consistent with assumptions in many research models. But retirees have some flexibility in how much of their preretirement income to replace.
“Model stress tests and empirical research suggest a wide range of replacement ratios,” Tan said. “If an expected replacement ratio of 80% includes significant discretionary spending, those whose assets look a little lean might be able to finance retirement with a lower replacement ratio.”
Another guideline that can be reevaluated, particularly in this market environment, is the 4% withdrawal rate. Vanguard’s research suggests a rate of about 3% is a more realistic figure given current inflation and muted expected returns for both stocks and bonds, Clarke said.
“It’s important to keep in mind that, ultimately, these are all just rules of thumb,” Clarke said. “There are too many variables with market conditions and each individual’s circumstances to reduce a solution to one number for everyone.”
These rules also ignore another potential source of income for retirees—the four walls that surround them.