The first question I ask clients when discussing their retirement plan is, ‘how much income do you need to maintain your current lifestyle in retirement?’ Not surprisingly, for the vast majority the answer is, “I don’t know,” or they’ve made an inaccurate assumption. If the assumption is too high, the goal of retirement may seem absolutely unattainable, and the entire planning process is discouraging. If the assumption is too low, which is most often the case, the retiree could run into a difficult financial situation later in life and have to make drastic, unwanted changes.
The general rule of thumb is to figure that you will need approximately 80% of your current annual income in retirement. I have to say that I’m not a fan of this generality. However, most people underestimate how much money they will need in retirement.
Keep in mind that retirees spend more on travel, entertainment and eating out especially earlier on in retirement when they have the time and good health to enjoy those activities. In their later years, health care cost can escalate.
To get a more accurate retirement number, we like the Kiplinger’s Retirement Calculator. You will need to have some information handy like your estimated Social Security payment, any expected income from pensions and any retirement savings to date. While you will have to make some assumptions, it will give you a pretty good estimate of how much you’ll need to save.