Retirement: % of current income

July 6, 2023 7:18 PM

How do you figure out your retirement income as a percentage of your current income?

When you go to use an online retirement income calculator, it always wants to know "current income" and "% of current income after retirement". Like if you make $100k now and will live on $80k, that's 80%.

How do people calculate this percentage? Do you start with your gross salary and work down? Or do you start with your take home pay and work up? If my take home pay now includes $X a month in savings, do I include that or not? (Savings are always good to have, but once retire your whole 401k becomes your savings, right?)

I keep getting a huge range of numbers depending on my approach, which probably says something bad about my budgeting skill.

For what it is worth, my goal in retirement is something like my parents: they never really stopped working, but around 65 they were able to set the effort level way lower. We all do project management in my family, so going to one project a year instead of all work, all the time. Being able to go 3 months at a time without working, that sort of retirement.

Thanks!

posted by BeeDo to Work & Money (11 answers total)

I would not recommend using this method of estimating required retirement income*. Instead, the nice folks at bogleheads.org advise you to figure out your projected retirement expenses (this can require a larger range of assumptions if retirement is decades away, but becomes more exact if it's coming up soon), and subtract any projected retirement income (e.g. Social Security, pensions, scaled-down earnings like your parents have, etc.). The remaining number will tell you what you need in retirement and then you can use that to determine how much you need to save between now and retirement.

*One reason to avoid the "retirement income as a percentage of current income" method is that before you retire, a decent chunk of your income should ideally go into retirement savings. You will no longer have to save for retirement once you are actually retired, so this method will often come up with numbers that are too large. This method also often doesn't take into account other sources of retirement income, again inflating the amount that you will need.

**I know Fidelity displays a giant dial every time I log in about how much I will need as a percentage of my income, and it's annoying. My current income doesn't really have anything to do with my future retirement needs, not to mention that income fluctuates during one's career, but my retirement income needs will be what they are, regardless of what I'm making now.
posted by Atrahasis at 7:29 PM on July 6, 2023 [12 favorites]

That's the hard thing about retirement planning, with every variable you can plan to guarantee that you'll have enough, or you can plan to probably have enough. The length of life, the stock market returns, the salary increase vs inflation between now and retirement, are all impossible variables to truly predict.

I've found that most people planning are extremely conservative where they want a 99% chance to not run out of money by, say, age 100. That feels overly cautious to me personally.

To answer your question, I would recommend you try to match your pre retirement non-savings income with your retirement yearly post tax pay. Include 401k disbursements, social security, and your other accounts. So if you make 100k now but save 70k, shoot for $70k in retirement.
posted by bbqturtle at 7:32 PM on July 6, 2023

Yes, you will get a huge range of numbers - it is not just about your budgeting skill about also about how impossible it is to predict future income and expenses.

But, since even a rough estimate is better than none, I think you can start to with your current expenses and then adjust the number to reflect what you expect to spend in retirement. For most people who don't carefully track their expenses, they can start with their take home pay less any take-home money that goes into savings. You will need to add money to cover health insurance and medical expenses. Do you expect your housing expenses to go down (move to lower cost location or pay off your mortgage). Later in life, they will go up if you need to move to assisted living or a nursing home. Do you plan to travel more or have major hobby expenses?

When you have a number that seems reasonable, then convert into the % of the number that you are giving them as your current salary.

The model should ask you about pensions and other sources of income outside of your savings and social security.

Since you have a source of extra income in your early years of retirement, I would probably think of that as your margin of safety/ room for luxuries. You can then adjust how much work you take on with an eye to how your actual savings/earnings/expenses are matching your projections.
posted by metahawk at 7:43 PM on July 6, 2023

> before you retire, a decent chunk of your income should ideally go into retirement savings

Two more reductions:

If you contribute to your health insurance, that will no longer be needed after age 65, though there will be other premiums you will want to pay.

Once you retire, social security and Medicare deductions will also not be a factor.
posted by yclipse at 9:24 PM on July 6, 2023 [2 favorites]

Just to pile on, a lot of retirement income is taxed at a more favorable rate than is work derived income. For starters, you do not pay Social Security tax on pension/SS checks, investments, etc. Additionally, for most people the tax on SS is more favorable than on earned income. Finally, capital gains and dividends are generally taxed at a more favorable rate than earned income. As Buffet has noted many times his tax rate is lower than his secretaries. There are a lot of moving parts, but for instance in my own case I would estimate that my overall tax burden is about half of what it was when I was making the same money working. (Mixture of SS, pension, investments)
posted by jcworth at 9:45 PM on July 6, 2023 [1 favorite]

It depends a lot on what you plan to do in retirement. Here's some things to think about:

How will your habits change? Are you going to replace an expensive restaurant habit with an allotment and a home cooking and preserving hobby? Or are you going to replace a "sleep all weekend to recover from work" lifestyle with one where you travel all the time? Your choices will make a big difference to your spending.

Will you be able to go from two vehicles to one?

If you're a homeowner, what are the expenses of that going to look like? At some point your house will need a new roof, kitchen, heating system, driveway, whatever. Your current expenses may or may not be representative of the long term expenses, if you haven't done much of this stuff so far. Will you want to downsize? Are you likely to do more of the cleaning/mowing/upkeep yourself, because you have time?

As for savings, you definitely should take them into account - not the rate that you put money into savings at the moment, but the rate at which you take it out. All those incidental/unexpected expenses that you would currently pay from savings - in retirement you'll need to have enough for that on top of however much you'll spend on regular expenses.
posted by quacks like a duck at 10:33 PM on July 6, 2023 [1 favorite]

You might find the concerts of savings rate or saving benchmarks pertinent to your question.

IMHO there is a time where future projections of spending are just super rough estimates. If retirement is several decades away, you may not necessarily know how future health, personal, economic, or family situations will impact your spending.
posted by oceano at 1:26 AM on July 7, 2023 [2 favorites]

I thinks more helpful to think of tomorrow as a change from.today.

So, are you going to live where you do now, or someplace cheaper? What exenses tied to work will go away at retirement? Etc.

Same on the income side. How much from Social Security, how much from savings? Of course, this is a number you have to live down to.
posted by SemiSalt at 4:37 AM on July 7, 2023

If you own a home and haven't borrowed against it, by the time you hit retirement age you probably won't be making mortgage payments (which are often a large chunk of your monthly expenses.)
posted by Larry David Syndrome at 4:56 AM on July 7, 2023

The old style final salary pensions work out to between 56% and 75%.

A low pension which increases every year to keep up with inflation can be worth more than a higher pension with limited growth for inflation, a few schemes have a 5% cap on inflation growth which I can see causing problems in the future.
posted by Lanark at 4:57 AM on July 7, 2023

Best answer: Percentage of income is a rough measure that's basically instant to calculate. It's handy for that reason, but not particularly accurate. If, like most people, you're saving a small amount, social security is an important source of income, and you won't have a mortgage, 80% is probably plenty, for the reasons outlined above. The way I calculate it is to take my gross and post-tax income, and calculate the percentages with the appropriate tax status. So Social Security is half taxed, pension and 401(k) are gross, Roth IRA is post-tax. As an example, let's say you are making $100K gross and in California. Your effective tax rate is 20.6%, make it 20% for ease. You might have $20K in SS, so 10/100 = 10% gross, 10/80=12.5% net, for a total of 22.5%. Let's say you're lucky enough to have a pension that pays 40K before taxes, so that's 50% for a total of 72.5%. So you'd need to draw another 7.5% to get to 80%. From your 401(k), that would be 7.5K per year. Meaning you would need a nest egg of $188K (25x the income need). Or you could draw $6K from your Roth IRA for the same amount after tax. It's a rough calculation, but reasonably useful.

Ideally you would know how much you're actually spending after tax. That requires doing some bookkeeping and/or budgeting on your end, but it's important if you're saving a lot. If you're saving a lot post-tax, with a backdoor or mega backdoor Roth, then your effective tax rate on retirement would be considerably lower, and your needs considerably lower than 80%.

If you're going to save hundreds of thousands of dollars, shouldn't you spend a few hundred on a more detailed assessment? The difference could be years of your life spent working when you could have been in control of your own time.
posted by wnissen at 9:04 AM on July 7, 2023 [1 favorite]