How much income will you need in retirement? Like many aspects of retirement planning, estimating this number is often challenging. While many professionals recommend using a certain percentage of your pre-retirement income, most individuals need to tailor their plans for their specific circumstances. So, what percentage might you begin with? And why might you need to raise or lower this percentage? Here's what you need to know.
The 80% Guideline
One common number that comes up during retirement income planning discussions is 80% of pre-retirement income. This estimate is based on two primary factors. First, it assumes that you want to maintain a similar lifestyle in retirement as you have just before it. Second, it assumes that some of your pre-retirement expenses — like retirement contributions or job expenses — will stop or be reduced.
Why You May Need More Income
Any standard estimation of income needs cannot possibly cover every person's situation. The 80% estimate, for instance, assumes that your taxes in retirement will be lower than your current tax bill. However, if you replace work income with an equal amount of taxable withdrawals, you may end up with a similar tax bill.
In addition, some expenses may go up during retirement. The most common is medical care and health insurance. As you age, you're more likely to need more medical treatment and long-term care. These may raise health costs significantly more than what you paid during your working life.
While it may seem counterintuitive, many low-income retirees and high-income earners may actually both need to plan for a higher percentage of income. Why? High earners often have ambitious plans for their retirement years and must fund more of their medical expenses on their own. Low earners, on the other hand, often relied on a higher percentage of their income to pay for daily costs of living.
Why You May Need Less Income
Not every saver should fret about needing to replace the vast majority of their pre-retirement income. If you live in a high cost-of-living city and plan to relocate to an area with a low cost of living, for example, you may not even need 80%. In this case, you would assess the actual costs of your destination and reevaluate how they match up to your old salary.
What else may lower your income needs? This may include access to employer pensions, delayed Social Security, how long your spouse plans to work, and whether you will carry debt into retirement.
Where to Start
No matter whether you find that you can plan on the oft-quoted 80%, you need to raise your target, or you may need less income, the best place to start is by meeting with a financial planner who specializes in retirement income planning. Make an appointment today to learn more about income planning.