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RISMedia, June 18, 2011—(MCT)—When you retire at 65, you’ll need 75 percent of your pre-retirement income to live comfortably in old age. And your money will have to last until you die at 92—or 94 if you’re a woman.

These are some of the assumptions that investment firms make about us for retirement planning. But how do they come up with these numbers?

It’s part science—and a bit of art.

Investment firms use statistics and studies to create dozens of assumptions, from when we are likely to retire and die to what future inflation rates will be or how much our 401(k)s will be worth in 30 years. The numbers are reviewed regularly and revised periodically, such as when Congress changes the tax code.

Assumptions are necessary; without them, it’s difficult to calculate whether your plans are on target or falling short. Of course, every person is different, so general assumptions won’t fit you precisely. But the assumptions are meant to apply to most people in most financial situations, says Stuart Ritter, a financial planner with Baltimore’s T. Rowe Price.

“It’s a guideline. It’s a stake in the ground for people to start their planning around,” Ritter says. “And then they can start customizing to their own individual situation. But a lot of people need a starting point.”

Major investment firms such as Fidelity Investments, Vanguard and Price develop assumptions in slightly different ways, but their results are often similar.

At Price, an assumptions committee—which includes the chief economist, financial planners, portfolio managers and tax experts—meets in the first quarter of each year to justify the numbers the firm uses.

“We set a very high bar for making changes to these assumptions because they are designed to be long-term,” says Ritter, who chairs the committee.

He says Price is careful not to use precise numbers, such as predicting workers will retire at 63.2 years.

“We use a round number because we don’t want to convey more accuracy than really should be given to what is essentially a starting point for people,” Ritter says.

At Fidelity, reviews of its assumptions are sometimes sparked by customer feedback.

The Boston-based investment firm says its assumptions are designed so clients have a 90 percent chance of meeting their goals. But when the stock market was bullish several years ago, investors asked whether Fidelity was being too conservative, says Jason Jagatic, vice president of retirement planning products.

Fidelity took their concerns under advisement, Jagatic says, but decided to stay the course. And good thing because when the market crashed in 2008, being more conservative cushioned the blow.

Here are some key assumptions that investment firms make, which can be useful to workers as they think about retirement:

Life Expectancy: “We have been blessed these days with longer life spans than in the past, but there is also a risk. You have to make your money last longer,” Jagatic says.

Fidelity, based on actuarial numbers, assumes men will live to 92 while women will live to 94.

Vanguard and Price assume a life span of 95 for men and women.

Price increased its life expectancy assumption by five years in 2004 after data from the Society of Actuaries showed many of us might live to 90 and beyond.

More than half of couples in their mid-60s today, the actuaries calculated, will have at least one partner live to age 90. And the odds of living to 90 or longer are even greater for today’s 25 and 45 year olds.

Income Needs: Fidelity assumes you will need 85 percent of your old salary in retirement. It chose that figure based on a 2004 study that found most retirees need 75 percent to 89 percent of their pre-retirement income, Jagatic says.

Price figures you will need 75 percent of your pre-retirement income to maintain your lifestyle because that’s about what you’re living on now, Ritter says.

Roughly 10 percent of pay goes toward payroll taxes for Social Security and Medicare, he says. And workers should be saving 15 percent of pay for retirement. That leaves 75 percent of your income leftover for taxes, the mortgage, utilities and other living expenses.

“You have built a lifestyle on 75 percent. If we want you to have the same spendable income in retirement, we need to generate 75 percent of your income in retirement,” Ritter says.

Pensions, Social Security and any wages in retirement are expected to replace 25 percent of your old income, Ritter says. The rest is expected to come from savings and investments.

Retirement Date: The median age for retirement is 62, according to the Employee Benefit Research Institute. Even so, investment firms assume we’ll work longer.

Fidelity figures we’ll retire when we reach the age for full benefits from Social Security. That used to be 65. But the age limit has been gradually rising, and those born in 1960 or later must wait until 67 to get full retirement benefits.

Price uses 65 partly because workers in their early 60s often don’t have enough set aside to retire and Medicare kicks in at that age, Ritter says.

Inflation Rates: Purchasing power is eroded over time by inflation, so you have to take that into account.

Firms say they make their predictions based on historical inflation rates—which have been mild in recent years. Fidelity uses an annual inflation rate of 2.3 percent; Price and Vanguard assume 3 percent.

Investment Returns: To figure out how much your nest egg might grow by retirement, you need to assume an investment return.

Jagatic says Fidelity uses sophisticated computer simulations to project future portfolio balances. So how much you could have in retirement will depend on your mix of stocks, bonds and cash and how many years you have to invest.

Price keeps it simple. Workers tend to invest more heavily in stocks when they’re younger and gradually shift to more conservative investments with age. Price calculates that this investment path will result in an average annual return of 7 percent while you work, and 6 percent in retirement.

Withdrawal Rates: Once retired, you have to make sure you don’t spend money so quickly that you run out.

The investment firms are pretty much in agreement: Withdraw 4 percent of your nest egg in the first year of retirement. Every year after that, increase the dollar amount you take out by the actual rate of inflation.

This should give you a 90 percent chance of not outlasting your money during a 30-year retirement.

You can check out retirement calculators on the investment firms’ websites and plug in your own figures if you disagree with their assumptions.

People should be conservative with assumptions, advises Dallas Salisbury, president of the Employee Benefit Research Institute. “Because they are not going to have the ability to save more money if the money is gone,” he says.

Salisbury, for example, assumes he will live to 110, given that both of his parents died short of their 94th birthdays.

“I use 110 because it’s possible,” the 61-year-old says. “I don’t want to take the chance of running out of money.”

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