Is the Wage Replacement Ratio Incorrectly Calculated?
When talking about retirement, most financial planners use a wage replacement ratio (WRR) to estimate whether or not you’re going to have enough money to retire. The approach is a top-down approach to figure out how much you’ll need in retirement by taking a percentage of what you make in the year before your retirement.
The approach is wrong. How so? As long as you don’t live on the hedonic treadmill
then the amount of income you make does not affect your expenses. Thus, the approach to figuring out how much you need in retirement should be to figure out how much you’re going to *spend* in retirement and determine if your assets can support that spending going forward. You’ll have to account for taxes: dividend income, capital gains, income taxes on pensions and the like, Roth conversions if they are available, and, as appropriate, tax due from tax-deferred retirement accounts. The amount withdrawn pre-tax should be below a safe withdrawal threshold and the after-tax funds should be enough to pay for your expenses.
If you’re there, then you can retire.
If not, there are a couple of things you can do.
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Jason Hull is a Fort Worth fee only, hourly financial planner who serves clients in Fort Worth, TX and Dallas, TX as well as serving clients nationwide.
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Hull Financial Planning is a Fort Worth, fee-only hourly financial advisor. The cities we serve in the Dallas-Fort Worth area include:
Arlington, Azle, Bedford, Benbrook, Blue Mound, Burleson, Colleyville, Crowley, Dalworthington Gardens, Edgecliff Village, Euless, Everman, Flower Mound, Forest Hill, Fort Worth, Grapevine, Grand Prairie, Haltom City, Haslet, Hurst, Keller, Kennedale, Lake Worth, Lakeside, Mansfield, Newark, North Richland Hills, Pantego, Pelican Bay, Rendon, Richland Hills, River Oaks, Saginaw, Sansom Park, Southlake, Trophy Club, Watauga, Westlake, Westover Hills, Westworth Village, and, White Settlement
Addison, Balch Springs, Cedar Hill, Carrollton, Cockrell Hill, Combine, Coppell, Dallas, DeSoto, Duncanville, Farmers Branch, Ferris, Garland, Glenn Heights, Grand Prairie, Grapevine, Highland Park, Hutchins, Irving, Lancaster, Lewisville, Mesquite, Ovilla, Richardson, Rowlett, Sachse, Sand Branch, Seagoville, Sunnyvale, University Park, Wilmer, and, Wylie
We also serve clients nationwide and can leverage technology to maintain our client contact and communication.
Hull Financial Planning, 2939 Crockett St. #315, Fort Worth TX 76107, (817)476-0584