What % of Your Income Do You Need in Retirement?

retirement incomeAnyone who has done any initial research on retirement planning has probably come across the popular advice to plan to live off of 75% of your pre-retirement income while in retirement. In other words, take whatever you are earning before retirement and multiple it by .75 to get your target income for post-retirement. If you earn $100,000 before retirement, plan to live off of $75,000 in retirement.

This simplistic rule of thumb is a great starting point and is logically based. After all, when you stop driving to work, buying work clothes, start paying lower taxes, it’s easy to see how you only need about 75% of your income. Maybe you have even paid off your house, like I plan to do as part of my retirement plan. Given the logic behind this over-simplified guide to retirement planning, I often accept this advice for what it is: an easy instruction guide for those who can’t handle complex equations. In other words, the 75% rule is one of the chapters in a Retirement Guide for Dummies book – and that’s okay; you could even say that it’s a good thing.

Can you sense the BUT coming..?

BUT, there are some thing that push me over the edge. In Stuart Ritter’s artice at T Rowe Price, he makes this introductory statement when it comes to retirement planning (emphasis added):

Because you will no longer be paying payroll tax or saving for retirement, you should be able to maintain your lifestyle and cover your expenses with approximately 75% of your preretirement income. Fifty percent should be generated from your retirement investments, with the remaining 25% coming from Social Security benefits and other sources, such as a pension or part-time wages.

What’s Wrong With This Statement

Here’s a step-by-step analysis of what Ritter does in these two sentences. Building off of the general rule of thumb to plan for 75% of your pre-retirement income, he breaks it down into what you should plan to replace with your retirement savings. He suggests that 50% of your pre-retirement income (2/3 of your post-retirement income) should be covered from your traditional retirement investments. In other words, things like your 401(k) or 403(b), IRA, etc.

Before I get into what concerns me with this approach, let me first say that I applaud his efforts – and T Rowe Price for that matter. I invest a portion of my retirement portfolio through TRowe and would gladly recommend some of their investment tools. His article, in general, provides valuable advice to the novice investor or someone who doesn’t want to stress about their retirement plan, and offers important advice to investors, essentially persuading them to invest more money.

But, what it also does is subtly encourage saving less for retirement. This is how I read his statement. “You don’t need to save enough to cover 75% of your income – you only need to save enough to cover 50%. The other 25% will take care of itself through social security, a pension, or part-time work.” As I suggested, this is probably great advice for someone who fails to save anything because they get stressed out about having enough. But, it’s probably not the best advice for an earnest person wondering if they need to be saving more money – someone like me.

My Approach to Retirement Planning

I’m someone who likes to be over-prepared than under. I grew up as a “Royal Ranger” (particular Christian denomination version of a boy scout), where the motto was “Be Prepared for Everything.” I wasn’t brainwashed, nor do I attribute my need to plan for everything to my few years in this program, but I do recognize that my lifestyle embodies this mantra. Just like how I am obsessing over a move that is months away, I’m also trying to be over-prepared for retirement.

That’s why when I’m not a fan of Ritter’s approach. Because when I read that first statement, whether I like to admit it or not, I found myself asking if I am saving too much for retirement. My sub-conscious and commitment to over-saving was challenged momentarily. Luckily, I haven’t changed my approach to retirement planning as a result of this one article. I still ask myself, “How much can I save?” instead of “How little do I need to save?”

Is it Ritter’s Fault?

I don’t blame Ritter. Most likely, he is writing to a particular target audience, and in that regard succeeds at getting his point across, which is to save more for retirement. However, I can’t help but wish he would rock the boat a little more. Given that his main point in his article is to persuade people to save at least 15% of their income, I’m guessing that he understands the importance being prepared for retirement.

But, I do wish he did more. I wish he would stand up and tell people how ridiculous they are for needing such an article. If you ask me, there is a culture of placing a low priority on retirement planning. Retirement planning should not be a last concern. Saving for retirement should be one of the first things you do after paying the bills. While I understand the desire to have the latest, greatest, fanciest gadgets, clothes, and other items, it’s just plain stupid to let this control your life.

Instead, why not try to save more than you need for retirement. What’s the worst that could happen? You have enough money to retire early? Follow your dreams? Able to travel more when you’re older? Able to provide financial support to your children and grandchildren? If you ask me, I would much rather have more money in retirement than I need than not enough – and that starts with re-shaping your approach to your finances.

Readers, do you think it’s possible for our culture to prioritize retirement planning?

11 Responses to What % of Your Income Do You Need in Retirement?

  1. I think your way is the best one: be OVER-prepared because you never know what can happen. I have seen many older people who can barely survive from month to month and I surely don’t want to be a burden on my family or face such a hard life. So, the more you can save, the better 😉

  2. Personally, I don’t agree with the idea of having your retirement number off of your income. Our current expenses are about 2/3 of our net income. If I get a raise, by expenses don’t change. So why should I increase my savings account to reflect a percentage of the higher income?

    • I agree 100% Edward. I should have addressed that issue as well. Either way, it points again to the fact that this metric is just a launching point. I hope people won’t stop here.

    • That sounds about right, if you ask me. After I buy a home (and stop saving for a down-payment), I want to shoot for somewhere around 30% so that I can retire early (or have the option to).

  3. I also don’t see a problem with saving too much for retirement, other than regrets that you didn’t get to spend the money. I figure if we do save too much, it will eventually be passed on to our son and make his life a little easier. I’d much rather have that problem than the problem of not having enough money in retirement.

  4. If people are saving for retirement, they aren’t going to be living off of 100% of their income. I’m trying to live on just 50%-60% of my income. Once I can retire that number is only going to drop further. I don’t see why they base it off a fixed 75%. It should be based on a reduction with what % you are living off of now.

  5. The simple formulas advocated in the T Rowe article are reasonable starting points for setting some goals. An even better approach would be to work through a spending budget for your retirement years (even a wild guess may be better than a 75% rule), and then extrapolate to your retirement date with anticipated inflation. From there, figure out what it will take to save enough to fund this for 30 years.

    The problem with assuming SS will cover 1/3 of your retirement is that SS doesn’t start until you’re 66+. I hope to retire long before then. I’m 55, and based on today’s rules, SS should cover 60% plus of my retirement expenses when my wife and I hit 66. It’s just getting to that point…

  6. Typical investing house advice – build the nest egg, let us manage it and milk you for fees, and try to stay alive as long as possible on the cash you managed to save.

    I’d much rather take that money and invest it in cash flow generating investments – dividend stocks, rental property, etc.

    Once I have 100% of my income covered, or at the very least 150% of my expenses covered, I can “retire” and stop spending time at the day job, and do what I want to do with my time.