Retirement Health Care Costs and Income Replacement Ratios

Financial advisors, plan sponsors, and millions of investors rely on income replacement ratios (IRRs) – a percentage of pre-retirement income – to estimate how much will be needed to maintain desired lifestyles in retirement. IRRs have provided advisors with a streamlined, top-down approach for assessing a client’s retirement readiness without having to calculate and project individual line-item expenses: a bottom-up strategy that is more comprehensive, but also time-consuming. A key assumption underpinning the use of IRRs is that pre-retirement income is a good basis for calculating income needs in retirement. Unfortunately, when it comes to health care this is not the case.


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