Are retirees happy living on less?

It's generally understood that most retirees live on a lower income than what they earned during their working years. But the key questions are how much lower, and are retirees generally satisfied with that income?

To find out, mutual fund company T. Rowe Price recently surveyed people who have retired in the past five years and who have accumulated some retirement savings in either an IRA or 401(k) account. These retirees are about three years into their retirement and report living on an income that, on average, is about two-thirds of their pre-retirement income.

And, as the survey shows, living on less doesn't seem to necessarily lower their quality of life:

  • 57 percent report that they live as well or better than when they were working
  • 85 percent agree with the statement, "I don't need to spend as much as I did before I retired."
  • 65 percent like spending less and see it as a new-found freedom
  • 89 percent are somewhat or very satisfied with their retirement so far

Of course, the findings aren't representative of most U.S. retirees. The median amount of household assets of the survey group was $473,000, including investments and home equity (net of debt). Most Americans approaching retirement have much lower assets. In addition, the survey didn't look at people who are further along -- 10 to 15 years -- into retirement, at which time they're more likely to be depleting their assets and having medical issues.

Nevertheless, the survey does provide one key insight: There's a very good chance you can live on much less money compared to when you were working. It's common to hear retirement planners state that you need a retirement income that's at least equal to 80 percent of your gross pay before retirement. But you may not need that much, and there are several good reasons why:

  • You may have already paid off the mortgage to your house
  • You may no longer be incurring expenses for children, including college costs
  • You're no longer saving for retirement
  • You're no longer paying FICA taxes, which, for most people are 7.65 percent of your pay.
  • You might have lower income taxes -- federal income taxes fall at age 65, and many states reduce their income taxes as well
  • You may simply decide that you'll spend less money and can still be happy, a key fact that was noted by the survey respondents

In addition, there's evidence that people in their 70s and 80s spend less money on clothes, household goods, travel and hobbies. On the other hand, many people in their 70s and 80s increase their spending on expenses for medical and long-term care, and you should plan for that possibility.

People who have significant amounts of discretionary income while working are most likely to be able to live on reduced income when they're retired. The 80 percent guideline from retirement planners may be appropriate, however, if you spend nearly all of your wage income on basic living expenses, and/or you're renting or won't pay off your mortgage any time soon.

The bottom line? Don't automatically assume you can live on a lot less money and pull the trigger to retire. Do your homework to see how much income and savings you need to support the life you want, given your circumstances regarding your mortgage and other significant day-to-day living expenses, and taking into consideration estimated medical expenses later in life.

Also be prepared to make adjustments. Many people will live 20 years or more in retirement, so be ready to deal with the unexpected curve-balls that life can throw your way.

  • Steve Vernon On Twitter»

    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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