How much money do you need to retire?

“The typical advice is that you should aim to replace 70% to 90% of your annual pre-retirement income through savings and Social Security. For example, a retiree who earns an average of $63,000 per year before retirement should expect to need $44,000 to $57,000 per year in retirement. Use our retirement calculator to figure out how much you need to save for your retirement.” Source: Nerd Wallet

Good advice, right?

There is just one problem. Don’t base your replacement percentage on your average income. Average income is what a pension plan and Social Security use.

Your living standard when you retire is based on your income at the time, not an average. You need to replace that income… unless you want a significant drop in your living standard.

3 comments

  1. I found that I spent 100% of my pre-retirement NET income in my retirement. My lifestyle fits my actual pre-retirement net income because I have no debt. But thinking about this a little more, my net income was about 70% of my gross income while I was working. Why? Because I was paying all kinds of taxes and contributing into my 401K and etc. My working and commuting expenses just shifted to other things now that I am no longer working so that was a push.

    I actually planned on having 100% of my base gross pay because I still have to pay some income taxes and medical. In my younger retirement years, we plan on being more active then we are expecting an increase in our medical costs in our later years. In the meantime, we still are saving some money each month for the unexpected bills. I refuse to depend on COLAs that might never happen.

    When I first start working the figure was 60-80%. I think young people should plan for 100-110% but be prepared to live debt free and a cheaper standard of living if they cannot get a pension or fund their 401Ks to the level needed to obtain 100%.

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  2. Why base your estimated annual needs on what your income was prior to retirement. A better rule would be what you actually spend.

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    1. What you earned before retirement is a starting point. If you need less, great. Unfortunately, you don’t know what you actually spend until you have been retired awhile.

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