I have absolutely no reason to hate the people at Aon, which describes itself as "the leading global provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting."I am sure they are nice folks who don't kick puppies and are good and upright citizens who help little old ladies across the street and pitch in during the annual bake sale.But when it comes to retirement planning, the statement they sent out a couple of days ago aon.mediaroom.com shows they don't have much of a clue.Oh, the headline was OK: "Workers are not Saving Enough for Retirement." You would be hard pressed to find anyone who would disagree with the fact that most of us are woefully under-prepared for retirement.But it was all downhill from there.Consider the first paragraph: "A worker planning to maintain a pre-retirement standard of living in retirement can require anywhere from approximately $15,000 to $185,000 or more annually from private and employer sources."How does that sentence help anyone? Am I going to need $15,000? $185,000? More?Aon goes on to talk about something it calls the Replacement Ratio Study, which "details the percentage of one's final annual salary that needs to be replaced for a person to keep the same standard of living after retirement. This allows workers to determine what they should be saving now and in the future, based on age, current salary and other factors."
Well, no, it doesn't.Aon's study "shows that a worker earning $50,000 at retirement will need to replace 81 percent of that amount annually to continue the same standard of living." And "a worker earning $150,000 at retirement will need to replace 84 percent of that salary to continue the same pre-retirement standard of living."And that makes absolutely no sense. Things don't cost 19% less (in the case of someone earning $50,000 a year) or 16% less (for the person earning $150,000 because you stop working.But that's not we are saying, the folks on Aon would respond."Generally, a person needs less gross income after retiring," said Cecil Hemingway, U.S. Retirement Practice leader with Aon Consulting."This is primarily due to the following factors: income taxes go down after retirement; Social Security taxes end completely; Social Security benefits are partially or fully tax-free; and saving for retirement is no longer needed."We will give Mr. Hemingway partial credit. Yes, if you stop working, you don't have to pay Social Security taxes on the money you earn, since you aren't earning any. But your tax rate could actually be higher, depending on how much you withdraw from your retirement savings.
And true, you aren't saving for retirement, but hopefully you will be spending during it and so your expenses could actually go up. Are you going to sit around the house all day once you stop working? There is travel you want to do. Hobbies to pay for, gifts to the kids (and grandkids), and charities you want to contribute to.
Companies, even well-intentioned companies like Aon, who say you are going need 81% or 84% (or whatever percentage) of what you are earning now in retirement don't have a clue what YOU are going to need.
Only you know.
If you want the Paul B. Brown rule of thumb, it's this: Figure you are going to need 100% of what you are earning now to live the way you want once you stop work.
The "worst" that will happen, if you follow my suggestion, is you will end up with "too much" money. And that is a problem you can probably live with.