What Percentage Of Current Income Is Needed For Retirement


Spend 80% To 85% Of Your Pre

Percentage of Pre-Retirement Income Needed For Retirement

The first method to figure out how much you need to save for retirement is to plan to spend 80% to 85% of your current income . So if you spend $3,000 a month now, youd want $2,400 $2,500 a month in retirement. The advantage of this is that it offers you a simple target to aim for when planning.

But this method falls flat if you have any unique circumstances. If you spend a significant chunk of your monthly income towards your mortgage but pay it off entirely by the time you retire, you might not need a full 85% of your current income.

However, you might see your expenses increase significantly if you have serious medical issues or need long-term care.

While its great to have a simple benchmark to figure out how much money youll need in retirement, think of this more as a jumping-off point than a hard and fast rule.

Plan For Higher Health Care Costs Especially If You Live Longer

Although you may be able to accurately estimate your entertainment, food, and transportation costs in retirement, health care is the one major outlay that is unpredictable and expensive.

Fidelity estimates that on average a 65-year-old retired couple needs $300,000 to spend on health care over the course of retirement3. For planning purposes, you may want to factor in an even higher number, because many people experience above-average expensesoften due to chronic illnesses, longevity, or long-term care costs.

Tip: According to research by Fidelity Financial Solutions, you should plan on factoring in approximately 15% of your retirement expenses will be related to health care expenses, year in and year out. In general, the more health issues you expect, the higher the retirement income replacement rate you may want to work into your retirement income plans.

How Much Will The Average Person Need To Save For Retirement

This is a difficult question, as everyones retirement planning needs will differ. However, you can follow some general guidelines to get an idea of how much youll need for a comfortable retirement.

First, youll need to estimate your post-retirement income. This will include any sources of income, such as Social Security, pensions, rental income, and part-time work. Next, youll need to estimate your expenses in retirement. This includes things like housing costs, healthcare costs, and leisure travel. Finally, youll need to factor in inflation. Over time, the cost of goods and services will increase, so youll need to account for this in your retirement planning.

Once youve considered all of these factors, you can estimate how much money youll need to retire officially. With financial planning, a good rule of thumb for a savings goal is to replace 80% of your current annual income. However, this may not be enough if you have a high standard of living or high health care costs. In general, its best to avoid caution and plan to replace as much of your income as possible.

Also Check: Best Retirement Communities In Sarasota Florida

So How Much Income Do You Need

The reason you don’t need to replace 100% of your pre-retirement income is that, when you retire, you’re typically able to eliminate certain expenses. For example:

  • You’ll no longer have to save for retirement .
  • You might spend less on commuting expenses and other costs related to going to work.
  • You may have paid off your mortgage by the time you retire.
  • You may not need life insurance if you no longer have dependents.
  • But retiring on 80% of your annual income isn’t perfect for everyone. You might want to adjust your goal based on the type of retirement lifestyle you plan to have and if your expenses will be significantly different.

    For example, if you plan to travel frequently in retirement, you may want to aim for 90% to 100% of your pre-retirement income. On the other hand, if you plan to pay off your mortgage before you retire or downsize your living situation, you may be able to live comfortably on less than 80%.

    Let’s say you consider yourself the typical retiree. Between you and your spouse, you currently have an annual income of $120,000. Based on the 80% principle, you can expect to need about $96,000 in annual income after you retire, which is $8,000 per month.

    Stay On Track For Retirement By Knowing How Much You Need To Save By What Age

    Only one

    A key part of retirement planning is to answer the question: How much do I need to save to retire? The answer varies by individual, and it depends largely on your income now and the lifestyle you want and can afford in retirement.

    Knowing how much you need to save based on how old you are now is just the first step, but it starts you on the path to help you reach your retirement goals. There are a few simple formulas that you can use to come up with the numbers.

    Also Check: Bay Breeze Nursing And Retirement Center

    Factor No : How Much Will You Spend

    The rule of thumb is that you’ll need about 80 percent of your pre-retirement income when you leave your job, although that rule requires a pretty flexible thumb. The 80 percent rule comes from the fact that you will no longer be paying payroll taxes toward Social Security , and you won’t be shoveling money into your 401 or other savings plan. In addition, you’ll save on the usual costs of going to work the pandemic won’t keep everyone at home forever such as new clothing, dry cleaning bills, commuting expenses and the like.

    You also need to factor in any pension or Social Security income you’ll be getting. If your annual pre-retirement expenses are $50,000, for example, you’d want retirement income of $40,000 if you followed the 80 percent rule of thumb. If you and your spouse will collect $2,000 a month from Social Security, or $24,000 a year, you’d need about $16,000 a year from your savings. Bear in mind, however, that any withdrawals from a tax-deferred savings account, such as a traditional IRA or a 401 plan, would be reduced by the amount of taxes you pay.

    AARP Membership -Join AARP for just $12 for your first year when you enroll in automatic renewal

    Join today and save 25% off the standard annual rate. Get instant access to discounts, programs, services, and the information you need to benefit every area of your life.

    How Much Should You Save

    Academic retirement saving studies use the term replacement rate. This is the percentage of your salary that youll receive as income during retirement from your retirement accounts. For example, if you made $100,000 a year when you were employed but receive $38,000 a year in retirement payments, your replacement rate is 38%. The variables included in a replacement rate include savings, taxes, and spending needs, and this rate may go up and down during the course of your retirement depending on a variety of factors such as market fluctuations, and your tax bracket, which could be subject to change.

    Don’t Miss: What Is A Traditional Retirement Account

    Determining Your Retirement Income Replacement Ratio

    When it comes to planning the income required to meet all your expenses in retirement, one of the big factors to consider is your current income. In general, the more money you make, the smaller a percentage of your working income you may need to replace when you stop working.

    For instance, a person making less than $50,000 a year before they retire might need to replace 80% of their preretirement income on average in retirement, and cover $40,000 in expenses. Someone making $200,000 may need only 55% of their preretirement income to help fund a retirement lifestyle that could cost up to $110,000 in annual expenses.

    “To get a sense of what you might need to fully cover your expenses, look beyond the 80% starting point. Try to narrow the range between 55% and 80%, factoring in your income, and then adjust your likely replacement income rate to get your number,” says Zhao.

    How Much Do You Need To Retire

    How Much Will You Spend in Retirement?

    No matter how young you are, its important to plan for your future – youll be glad that you did.

    Its hard to know exactly how much youll need in later life because everyone has different circumstances and different expectations.

    But by planning how much youll need, and working out how best to build up your pension pot, you’ll be in a great position to live your best life in later life.

    Read Also: How To Start A Retirement Fund

    Using Actual Living Expenses

    This will result in a much more specific retirement income projection. Rather than using a simple percentage, or your after-tax income, you actually calculate what your current expenses are.

    There are two ways you can do this:

    Compile your actual annual living expenses – That means going through your checkbook, bank statements, and credit card statements to determine how much money you spent. If you want to be really accurate, analyze your expenses for the past two or three years, and then use an average. That will reduce the likelihood that you will be basing your all-important retirement income projection on a number that is either unusually high or unusually low.

    Calculate your annual living expenses by removing non-living expenses from your income – Rather than analyzing expenses, which is admittedly a tedious process, you start with your annual income and then deduct non-living expenses, such as income taxes, retirement contributions, and non-retirement savings contributions. The net result should be the actual amount of money spent in the course of the year. Once again, this is best done over a two or three-year period.

    Know The General Rules Of Thumb When Planning For Retirement

    While everyone’s situation and needs will be different, there are a few primary rules of thumb that most financial advisors follow, which you should consider when determining how much to save for retirement.

    Retirement income as a percentage of pre-retirement income

    Many financial professionals recommend that you account for between 70% and 80% of your pre-retirement income each year in retirement. This means that if you currently earn $60,000 per year, you should plan to spend between $42,000 to $48,000 annually once you retire.

    This isn’t a set rule for everyone, and you may need to even account for more savings. “Many people need to have income streams cover 80%, 90%, or even 100% of their pre-retirement budget,” Ludwick says.It all depends on your specific expenses now and in retirement.

    Saving 15% of your earnings every year

    If you start saving for retirement early enough, an annual savings rate of 15% may be sufficient to meet your goals. If you’re off to a late start, you may need to save a lot more each year in order to catch up.

    “As you get older, the amount needed for savings to reach the same end goal roughly doubles every 10 years,” says Tolen Teigen, chief investment officer for FinDec, a national financial advisory firm located in California. “So, if someone waits ten years to start saving, instead of 30, they are now 40. Instead of 8% to 10% annually, they are now looking at 16% to 20% saved to reach the same end number.”

    The 4% rule

    Don’t Miss: Money Saved For Retirement By Age

    Realistically Estimate Your Retirement Expenses

    Don’t rely exclusively on the “experts” to tell you how much you’ll need to live comfortably when you retire. Most retirement articles or website calculators say you need 70% to 80% of your current income during retirement . For most people, this is a gross overestimation of what they’ll really need. Most retirees live quite comfortably on 40% to 60% of their pre-retirement income.

    Consider who pays for advertising in the financial magazines and websites — financial firms selling retirement plan products. Then ask yourself whether it’s surprising that most articles overestimate retirement needs. This is not to suggest that journalists are strictly catering to their advertisers, but if a magazine’s bread and butter is advertisements, the articles are unlikely to consistently downplay the need for retirement products.

    So how much will you need to live comfortably when you retire? To arrive at a realistic number, use your common sense and keep your planning simple. First, determine how much you spend now. Then subtract the expenses that you will not have in retirement. This number can be quite high and often accounts for a big reduction in needed income during retirement. Finally, add any additional expenses that retirement will bring. The final number is the amount you’ll need to live each year. Each step is discussed below.

    If You Got A Late Start With Saving

    How Much Should You Be Saving for Retirement â CAPSTONE FINANCIAL ADVISORS

    Dont despair if you start saving later in life. The best way to make up for getting a late start is to save harder.

    The older you are, the more you should be saving and diversifying for retirement each month. Dont over-allocate a portion of your savings to stocks with the thought that you need riskier investments to make up for lost decades of savings. Risk cuts both ways. You wont have as much time to bounce back if your investments suffer.

    Use index funds. Look for low-fee funds. Spread your money between a mix of stocks and bonds. Keep doing that through the rest of your working career, with the goal of saving 25 times your current level of spending by the day you retire.

    Use a retirement calculator to make sure youre on track. Ignore scary headlines in the financial news. Youre playing a long-term game. Getting caught up in the daily ups and downs of the market will only curb your progress.

    Recommended Reading: Jobs For Retired Mechanical Engineers

    How Much Money Will You Need In Retirement

    Yes, some costs are probably going to go up. With more time you’ll probably travel more. Like most Americans, you’ll spend more on health care than you do now. You might even still be providing some support for children. But overall, there is likely to be a huge reduction in your required income once you retire. Let’s look at the math.

    Take your current income, let’s say $200,000.

    Subtract out 20% for taxes and 20% for retirement and you’re down to $120,000.

    Subtract out 5% for insurance, 5% for child-related costs, and 15% for your mortgage. You’re now down to $70,000.

    Subtract out another 1% for job-related expenses, 2% for reduced charitable contributions, and 1% for reduced housing expenses. You’re down to $62,000.

    Add back in say 10% for increased travel costs and 5% for increased health care costs. This moves us up to $92,000.

    Subtract out $36,000 for social security and that leaves us at $56,000, or 28% of our current income.

    Finally some good news in personal finance. Your expenses are not just likely to go down in retirement, they are likely to go down DRAMATICALLY. Even if I’m off by 50%, you’re still not going to need 70% of your income replaced.

    Now, it’s important that you run the numbers for yourself, using your expenses and your desired retirement lifestyle. But I think if you do you’ll be pleasantly surprised. Save money consistently, invest it wisely, and a comfortable retirement is well within reach.

    Two: Subtract Expenses You Won’t Have When You Retire

    The good news is that many of your current expenses will be gone by the time you retire. Determine what those items are and how much you currently spend on them each year. Here are some of the common costs that are often reduced, or eliminated, in retirement.

    Mortage. In 2006, 81% of U.S. householders over 60 owned their own homes and most were fully paid for. Not having to make mortgage payments is the biggest factor in many retirees’ reduced cost of living.

    Child-related expenses. Sports equipment, after-school activities, braces, college — these are some of the expenses that disappear after children leave the home. The typical middle-class family spends about $8,000 to $10,000 per year for a teenager that goes to public school. If your children attend private school, this number, of course, increases dramatically.

    Everyday transportation. Not having to commute to work saves at least $100 to $200 per month. Once you drive less, your car will last longer, too — another big source of savings.

    Travel. Retirees often have more flexibility as to when they fly — so can take advantage of cheaper plane tickets. Also, many organizations, such as Elderhostel, offer reasonably priced educational travel programs for seniors.

    Clothing. Many people spend less on clothes in their late 60s, and even more so in their 70s and 80s. These savings are usually because:

    • retirees don’t need to purchase clothes for work, and
    • people with more time can scope out the sales and good deals.

    Don’t Miss: Retirement Communities In Prince William County Va

    What Percentage Of Income Should Go To Retirement

    This can be a tricky question, and is one that anyone who plans to retire someday should ask, what percentage of income should go to retirement?

    The answer can be complex because the amount of retirement income needed is different for everyone and depends on your age, employment status, retirement time frame, current savings, access to retirement plans, and more.

    Before you calculate the percentage of your income to save for retirement you need to know:

  • How much do you need to save for retirement?
  • How much do you currently have saved?
  • What is the gap? How much do you still need to save before you retire?
  • You have probably heard many theories, a popular one is being told to save 15-20% of your income, starting in your 20s. However, what if you didnt do that? It doesnt mean you cant save enough for a comfortable retirement income.

    Although most experts will agree that 15-20% of your take-home income is a good start, there are other factors to consider, each depending on your own circumstances and retirement plans.

    For example, some people start slow, like investing 5% off their income to start, and then increase their savings by a specific percentage each year. This tactic might work best for a younger investor, but can also be applied if you are closer to retirement, but the percentage may need to be higher. Gradually increasing the percentage you save for retirement income is a less dramatic effect on your paycheck, and can be easier for some people.

    Share post:


    More like this