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How Much Retirement Income Do You Need?

If you want to continue into retirement the standard of living you're accustomed to while working, conventional wisdom from financial planners says you'll need a retirement income that's equal to 70 percent to 100 percent of your pay just before retirement. Retirement planners call this the "replacement ratio" method of determining retirement income. But is this method right for you?

It's certainly not right for everybody. For instance, there are several reasons you might need less income during retirement than you did while you were working:

  • Income taxes might decrease.
  • You'll have no more FICA or other payroll taxes to pay.
  • You'll be able to reduce or eliminate your work-related expenses, such as commuting or special clothes.
  • You're no longer saving for retirement.
  • Child-related expenses are reduced or go away completely.
  • You might pay off the mortgage on your home, downsize to one car, or otherwise reduce your monthly expenses.
On the other hand, you might be someone who needs more income during retirement because:
  • Your medical expenses increase.
  • You're taking care of dependent parents.
  • You're traveling more or are pursuing more hobbies and activities.
  • You might need to pay for long-term care expenses.
  • You spoil your grandchildren.
The money needed during retirement will be different for everybody, which leads me to suggest a better solution than the "replacement ratio" method. Instead of relying on a percentage or figure determined by someone else, define the income you need to support the life you want. In other words, how much money do you need to meet your living needs and be happy?

Using a retirement calculator can help you figure that out, as long as you use one that allows you to itemize your expected living expenses. Even better, some calculators, such as Fidelity's Retirement Income Planner, allow you to categorize some expenditures as necessary and some as discretionary. It then tells you how much of both types of living expenses your projected retirement income will cover.

One of the most detailed online retirement calculators I've seen is RW2 for YOU, available for purchase at It examines your future living expenses in detail and helps you decide the trade-off between reducing living expenses and the age at which you can retire.

Another possible refinement with projecting your living expenses is to consider that you might spend more in your early years of retirement, when you're very active, and spend less in your later years when you're less active. I'm fine with this refinement as long as you also project higher expenses in your later years for medical and long-term care. You can find one online retirement calculator that uses this technique at

If you rely only on conventional wisdom, the consequences can be unpleasant. If your goal is too low, you might run out of money before you die (actuaries call this event "ruin"). And if your goal is too high, you might unnecessarily postpone your retirement. I urge you to do the math to estimate how much money you need to meet your needs and be happy for your retirement years, and not rely on generalized goals that may not fit you best.

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