Are you prepared for retirement? Do you know how much of your income you need to replace? Most people think that they will need to replace about 80% of their pre-retirement income. While this may be true for some, it is not a set in stone magical number, and many may be able to survive comfortably on much less than 80%.
First let’s face the fact that most of us do not have a well-developed financial plan in place. And by not having a financial plan in place most people have no idea how much they will need to replace in retirement. So the first thing is to develop at a minimum a budget and income statement that will show you where your money comes from and where it is going. Once you know these bits of information you can begin to see what will need to be replaced in retirement.
In a recent survey, I read the average retiree needed only to replace about 66% of their pre-retirement income. And 57% of the people who responded stated that they were living as well or better than they were prior to their retirement. And perhaps one of the most telling statistics was 85% agreed with the statement “I don’t need to spend as much as I did before I retired to be satisfied.”
If you do not think that the 80% rule is for you then break down the figures manually. Off the top, it will assume you are no longer saving 10% of your salary for retirement as you are now retired. That will free up a nice portion of your needs right off the bat so to speak as you no longer will be working or saving for retirement. In addition, to that 10%, being retired you will no longer be required to pay Social Security or Medicare taxes that total 7.65% of your paycheck. Also, when you are in retirement, your income taxes should be reduced as well as you are no longer working for earned income or a salary. In retirement, if you can itemize some changes will benefit you as well such as medical and dental out of pocket expenses are now 7.5% and not 10% as they are for younger people. Since you will be retired, a good portion of your income will be derived from Social Security, which is partially or entirely tax-free money.
However, despite these savings healthcare is an unknown variable in any retirement equation. No one knows if they will be required to have a nursing home stay or not. If you are confined to one, the costs associated with the visit can be substantial indeed. If you have a family history of illnesses that could result in a nursing home stay it may be beneficial to look into Long-Term Care insurance.
According to one government source, it can cost as much as $250,000 to raise a child to age 17 and can increase another $100,000 to $200,000 if the college is factored into the equation. So childcare expenses can also decrease your post retirement expenses to a degree if you no longer are supporting your children. But even if they are out of the house many parents still help their young adult children especially right after college when they are starting their careers.
By not having children, this can provide some retirees areas where they can make additional savings while in retirement. But in many instances empty nesters increase their spending as they tend to travel more or eat at nicer restaurants.
If you were saving more than the minimum 10% of your salary, you are in a position where you can live in less than 80% of your salary. Some people save as much as 20% or 25% of their salary before any company matching. These people can naturally live on much less than 80% as they were anyway prior to their retirement. This shows us that the more you save prior to retirement the less you will need to live on after you do retire.
If your mortgage is paid off you will also be able to live on less than the 80% most are recommending. The reason for this is housing is one of our largest expenses prior to retirement on a month to month basis. Therefore, if you can pay off the mortgage prior to retirement or at least in the first few years of retirement you will be much better off in the long run financially. But a sad reality is that more and more retirees are taking their mortgage payments into their golden years.
While there is no one particular figure, that needs to be aimed for when it comes to income replacement there are some ways to get a good sense of what will be needed. Budget your money now and see what will be eliminated in retirement. Then aim to achieve that figure.
If you need additional information or have, any questions feel free to contact me.
