Retirement Calculator

Retirement income as a percentage of pre-retirement income is another personal finance topic that bounces all over the place and gets people flustered. Just like whether to invest or pay off the mortgage early, it’s hotly debated (or as hotly as something in personal finance can be debated). Flexo at Consumerism Commentary had a really nice post on the topic a couple of months ago.

So how much of your pre-retirement income do you need to plan on replacing in retirement?  You can check out a free retirement calculator.

Conventional wisdom

The most common number you’ll hear on this topic is 80%. ‘Shoot for replacing 80% of your pre-retirement income.’ It’s a refrain that’s mostly useful, I think, to get people in the frame of mind for retirement planning. And I also think it’s a reasonable number. This is the percentage put out by firms like Fidelity, Schwab, and T. Rowe Price.

My analysis

I used to actually be one of those people who erred on the high side. I figured with what I’d want to do in retirement, I’d need more like 100% of my pre-retirement. But lately I’ve been thinking and I’ve come to a different conclusion. I think I will personally need something like 75%.

I came up with 75% of pre-retirement income after doing just a little analysis. Starting at replacing 100%, I reduced that amount by the following: 7% Social Security taxes; 19% 401(k) savings; 15% Mortgage payment.

In retirement, I obviously won’t be saving for retirement - either on my own or through Social Security - so right there I can reduce the amount I need to replace by 26%. Furthermore, since we’re accelerating the payment of our mortgage, we won’t have that payment (though we will still have to pay property taxes and insurance, obviously). The mortgage is considerably more than 15% of our income right now, but by the time we retire, it will be a good deal less thanks to inflation.

Going in the other direction, some expenses will be much higher in retirement, namely health insurance and long-term care insurance. So I tacked on 11% for those. Then I added a ‘buffer’ of 5%. Leaving me with a grand total of 75%.

I’m not saying my number is necessarily right, even for me. The point is, I gave it some thought instead of just going by what a book or article says.