To retire comfortably, you’ll need to have an income of 80% of your maximum pre-retirement income.
That’s a common rule of thumb you hear trumpeted by financial planners. Unfortunately, it’s not accurate. It may give someone planning their retirement a basis for thinking about creating income during those years, whether from part-time work or income-producing investments, but it can also provide a false sense of security.
“The Mole” is an undercover financial planner who writes for Money Magazine, and he has a better way at looking at retirement needs. It promises to be more accurate. He believes that if you have to estimate something, you should estimate your expenses first, and work backwards from there.
Clients often come to me with this same question, and I can’t answer it without knowing how much they are spending. Some clients making $100,000 per year are only spending $50,000, while others are earning $110,000 and getting further in debt. So you should really ask, What percent of my current annual expenditures should I expect to spend in retirement?
Typically, unless they make drastic lifestyle changes, retirees will spend the same, if not more, than they did before retirement. The Mole suggests estimating your full expenses and adding 10% to that figure. Now you’ll need a way to come up with that income in retirement.
Taking this approach would certainly inspire me to come up with ways to cut back expenses. Perhaps I will move to an area with an extremely low cost of living. Perhaps I should do any world traveling now while I have a steady income.
It’s not all bad. Once you’ve retired, you don’t have the “expense” of saving aggressively for retirement, so more of your income will be available for your expenses.
Retirement – How Much You’ll Really Need [Yahoo Finance/Money Magazine]
Updated December 20, 2011 and originally published November 27, 2007.