What percent of your current income will you need in retirement?

In retirement planning, the most important number is not the total amount of money you have saved, but how that grand total will translate into a sustained monthly income for the entirety of your retirement years.

That essential math question is something a retirement advisor can estimate for you based on your projected income from Social Security, pensions, annuities, 401(k), IRA, etc. Working backward from your best-case life expectancy (and accounting for inflation), your advisor can calculate how much monthly income you can expect from these resources after you retire.

Once you have that estimate, compare it to your current income.

Don’t panic if that estimate does not seem very close to your current annual salary. While you are working, your gross pay has to cover two major expenditures that go away in retirement:

  1. The amount you are currently putting into your retirement fund can (and should) be anywhere from 5-15% of your gross income.
  2. Your contribution to Social Security and unemployment insurance is 6.2% – or 12.4% if you’re self-employed.

To calculate whether your projected retirement income will be sufficient, don’t think about it in terms of your gross salary but instead the net income you actually have in hand to spend.

The 70-80% Spending Rule

Retirement advisors at Fifth Third Securities generally agree that a good rule of thumb for estimating your future spending is to multiply your current monthly spending by 70-80%. If that’s less than the monthly amount your retirement funds have been forecast to produce, that’s a good sign – but you may need to take it further than this.

While the 70-80% Rule is a good starting point, the actual percentage can vary considerably depending on individual circumstances. A study of actual retirement cost found that while spending in retirement ranges from 54-87%,that most retirees use 70% or less of their former income.   

You’ll want to consider several important factors when estimating your monthly spending in retirement to determine whether you’re going to be on the lower, higher or right at the mid-point of that range.

Estimating monthly costs in retirement

When estimating your monthly costs, start by looking at where your money is going now and consider whether that spending category is likely to change when you reach the age that you plan to retire. Here are some of the more common factors:

Housing cost: If you are paying on a mortgage, will your home be paid off by the time you retire? Are you downsizing to a smaller home that will cost less? Will your property taxes change?

Debt management: While managing debt can be a healthy part of financial planning during your working years, as you get closer to your projected retirement age you should do your best to plan your way out of debt. Those with higher incomes are not immune to debt accumulation, such as for luxury home mortgages or high credit card balances.

Subsidizing other generations: According to the Pew Research Center, 15% of those age 25-35 were still living with their parents. Even among empty nest households, adult children haven’t fully fledged from their parents’ bank accounts – often getting financial help with car payments, insurance or cellphone service.

In addition to helping their kids, parents nearing retirement may still be caring for their own parents. Retirement advisors call this the “Sandwich/Oreo Effect” because these pre-retirees are feeling a financial squeeze at both ends. For retirement planning, the important question is whether those financial responsibilities to other generations will continue once you’re retired.

Work-related costs: If you have a long commute, you’re likely spending money on gasoline and putting costly miles on your car. You are also likely to be spending more money on clothing and business lunches than you will in retirement.

Plan for your retirement lifestyle

Although you may need less money to maintain your household, your spending on other priorities may increase depending on what you want to do in retirement. If you plan to travel, restore a vintage automobile or engage in any other retirement pursuit that has a financial cost, include an estimate of that cost in your budgeting. After all, the whole point of retirement is to have the time to do the things you want to do. So, don’t neglect these aspirations in your retirement planning.

Phases of activity in retirement

Retirement advisors see a common activity pattern in retirees that is usually described as “go-go, go-slow and no-go.” In the first years of retirement, you may be fired up to march through your bucket list. In the middle period, you may still enjoy travel and activities, but less frequently. In the advanced period, many prefer enjoying life closer to home.

Like any rule of thumb, these phases don’t apply to everyone, but in general they suggest that you should anticipate spending needs to be a little higher in those first years of your retirement than in the long term.

Use a broader target to hit the mark

Working with a retirement advisor to calculate your current rate of savings and coupling that with a careful analysis of your current and prospective spending habits can help you more accurately figure out how much sustained monthly income you’ll need in retirement. If the numbers aren’t aligned as well as you’d like, talk to your advisor about how to adjust your plan to get where you want to be.