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3-2-1 Newsletter (7-09-2020)  Thumbnail

3-2-1 Newsletter (7-09-2020)

10-Minute Read

Let's dive right in. Here are three ideas, two quotes, and 1 question for the week.


I. What is the real goal?

The real goal is not to beat the market to build a retirement nest egg. The goal is to build a diverse set of income sources and other assets that can generate income to fund lifetime spending and meet legacy and liquidity needs while managing the risks that pose the greatest threats to these goals.

The real goal is not to read more books. The goal is to understand what you read.

Don’t let a proxy become the target. Don’t optimize for the wrong outcome.

II. Why you may be over saving for retirement and not know it.

Conventional wisdom suggests the amount of income you'll need in retirement using a replacement ratio (where retirement income equals a percentage of pre-retirement income) can be anywhere from 70 to 85 percent. While this is a good starting point, it may not be realistic for everyone. That's because, intuitively, the replacement ratio should be proportional to the pre-retirement income level. The higher the income, the higher the replacement ratio. However, this line of thinking has evolved based on research that suggests your replacement ratio is inversely related, not proportionally related, to your pre-retirement income. This means the higher your income before retirement, the lower your replacement ratio. It works just the opposite for lower-wage earners. 

Essentially, those with higher-paying jobs had proportionally more income going to retirement, job-related expenses, and taxes before retirement than necessities. And once they retire, these expenses go away, resulting in a lower income needed to fund the necessities and reducing the percentage of pre-retirement income needed. 

Using the new replacement ratio formula (below), someone with an income of $86,882 would have a replacement ratio of only 58 percent, not 70-85 percent, as under the old formula. In some cases, this can reduce the retirement income needed by up to 32 percent. Someone using the old formula would have over-saved by that amount.

Median Replacement Rates as a Percentage of Pre-Retirement Income



25th - 50th

50th - 75th

> 75

Pre-retirement income range


< $49,941

< $86,882

> $86,882

Replacement Rate





Source: Marlene Lee, DFA. "The Retirement Income Equation: Understanding how to arrive at a target replacement rate." DC Dimensions, Summer 2012.

Replacement ratios provide a great way to start thinking about how much income you’ll need in retirement, but they are only the story's beginning. You'll need to consider other anticipated income needs to arrive at your true retirement needs. Under the old formula, retirement costs are overestimated, leading to over-saving for retirement. Under the new formula, costs are reduced while savings are more closely matched to actual needs.  

III. What I can focus on today is that I will continue working for my retirement tomorrow.

We all know that wishes won’t wash dishes -- much as we might like them to. The simple truth is, if you want to achieve something, whether that be a comfortable retirement, an improved golf game, or better fitness, you need to roll up your sleeves and get on with the task at hand. And that usually begins with attention management, where effort and thought are focused on those quintessential elements required to achieve the desired vision. 

In the context of retirement, here are a few focal points for today that can pay dividends tomorrow:

  • I can focus on satisfying spending goals for life.

  • I can focus on preserving financial assets for legacy and liquidity.

  • I can focus on managing risks that stand in the way of the items above.


I. OOPs! Medical expenses can eat up retirement income 

Few things like rising medical costs and long-term care can erode retirement spending and security. Research from the Center for Retirement Research at Boston College indicates nearly one-fifth (18%) of retirees had less than half of their 2014 Social Security income remaining after out-of-pocket (OOP) spending, with 6% of retirees falling below 50% of total income. With less than two-thirds of their Social Security benefits available for non-medical consumption and limited income outside of Social Security for much of the elderly, many retirees likely feel that making ends meet is difficult.

None of this should come as a surprise. Average OOP spending (excluding long-term care) was $4,274 per year in 2014, with approximately two-thirds ($2,965) spent on premiums. In 2014, the average retiree had only 65.7% of his Social Security benefits remaining after OOP spending and only 82.2% of total income.

What this means for you: Medicare’s high out-of-pocket (OOP) costs will substantially reduce retiree’s income from Social Security benefits and other sources and chip away at both Social Security and total income. This seriously threatens retirement security for many, especially those on a fixed budget, as funds earmarked for other spending goals will be diverted to pay higher-than-expected medical costs. Solutions abound, from setting aside a higher amount for annual medical costs (I recommend at least $5,513 annually) and bolstering coverage through a Medigap policy to seeking affordable healthcare outside the U.S.

Source: Oops! Medical expenses can eat up retirement income.

II. Simplifying Your Life Before Retirement: 3 Simple Steps

 As you approach retirement, it’s important to take proactive steps toward simplifying your finances, so you don’t spend some of the best years of your life scrambling to make ends meet. Before you embark on your new and exciting chapter, consider taking these three simple steps to make your life during retirement a bit easier and stress-free.

1) Consolidate: As much as possible, pick one institution to hold all your assets to make it easy to track all your resources.

2) Automate: Set up automatic payments for recurring expenses to avoid worrying about missed payments every month.

3) Focus: Center on the things that bring you the most value. Revisit any policies you've had for years to see if they are truly necessary and accommodate your evolving needs.

 Source: Simplifying Your Life Before Retirement: 3 Simple Steps


I. What is the biggest small thing I could do today for my retirement?

Prudent retirement income planning begins with identifying and implementing the actions necessary to support the goals while protecting against risks that stand in the way of those goals. Undertaking the right actions consistently before and during retirement is crucial to your golden years. 

We’ll look at one action item to take and reveal a new one each week.

This week’s smart habit: The journey of a thousand steps starts with the first step. And like all journeys, retirement isn’t achieved in a single leap or bound but instead in a series of well-thought-out, coordinated actions executed over time. While maintaining a sufficient savings rate, selecting the appropriate asset allocations, and adhering to the plan you and your advisor developed to reach your retirement goals, don’t lose sight of the biggest small things, such as having a clear vision of what retirement looks like, ensuring your investment strategy aligns with your risk tolerance, and awareness of the trade-offs you are willing to make to achieve your retirement objectives, etc. that are as impactful to retirement success as the aforementioned. 

What is the biggest small thing you could do today for your retirement?


Have a Question? Want to chat about it?

Get In Touch

Until next week,

Mark Sharp, CFP® RICP® EA

Mark Sharp Retirement