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When it comes to estimating your retirement income, a popular rule of thumb is that you’ll usually need about 80% of your working income to maintain the same standard of living. This comes from a number of factors, including the fact that you won’t need to set aside money for retirement anymore.
This number is flexible, to be sure, and will vary from household to household. If you currently live significantly below your means, for example, then you probably can comfortably estimate lower. If you live paycheck-to-paycheck, you might want plan for either more income or fewer expenses. But 80% is a good place to start.
For example, let’s say that you’re 48 years old and currently make $95,000 per year. With $430,000 in a 401(k), what kind of retirement budget should you plan for?
Here’s how to think about it. You can also consider using this free tool to match with a financial advisor to discuss the specifics of your situation and how to plan accordingly.
Usually, we start with your money and build a budget from there. This time, though, let’s start with your spending. Here, you make $95,000 per year. So with our back-of-envelope estimate, we’ll start by assuming you will need about $76,000 per year/$6,350 per month to maintain your current standard of living ($95,000 * 0.8).
The math doesn’t end there though.
Here, we have a couple of major moving pieces. First, at age 48 you may well have several expenses that you shouldn’t expect in retirement. Most notably, spending or saving priorities related to dependents will likely fall off in retirement. Spending on your children or earmarked saving for college funds, for example, is a major part of your budget that you probably won’t need in retirement.
On the other hand, you have roughly 20 years before full retirement age. That’s a long time, with lots of room for your income and lifestyle to grow. This makes your future needs more difficult to forecast, since it’s entirely possible that your standard of living will be based on more than $95,000 per year by the time your turn 67.
In general, do your best to anticipate the foreseeable changes to your life and needs. Beyond that, though, we can start by planning to maintain your current standard of living at your current income.
Next, remember the long-term costs associated with retirement. Most notably, your budget should always anticipate taxes and inflation.
