How Much Income Do You Need In Retirement?

Conventional wisdom says that all your retirement income sources should generate 70% of what your pre-retirement income is, so if you lived off $100,000 then you’ll need $70,000 each year in retirement. That advice is good as a rule of thumb but there are many special factors that should increase that number including health and spending habits. That’s where Jack VanDerhei, a Fellow at the Employee Benefit Research Institute, comes in – he has developed a more rigorous and realistic way of assessing how much you will need in retirement.

VanDerhei’s methodology uses six additional factors:

  • Your potential for a health crisis in retirement
  • The spending habits of retirees who are generating the income you want your nest egg to generate (e.g., more than $40,000). In separate research, EBRI found that a majority of retirees say they spend 95 percent or more of their pre-retirement income.
  • Your longevity risks
  • Your investment risks
  • The effect of annuitizing a portion of your nest egg when you retire, to insure you receive a steady source of income for life.
  • What you must save to achieve a 50 percent, a 75 percent and a 90 percent chance of reaching your goals. Most retirement savings calculators approximate a 50 percent probability.

Here is an example:

So, for example, say you’re a 40-year-old woman, making $70,000. You’ve already saved $50,000 for retirement and you want to retire at age 67.

According to VanDerhei, if you want a 90 percent chance of having adequate retirement income, you should save 26 percent of your income every year.

If that recommendation seems steep, it is, especially considering most people typically save less than 7 percent of their income in their 401(k)s.

But you may not have to come up with the full 26 percent yourself if your employer matches your 401(k) contributions.

Or, if you’re willing to work part-time in retirement and earn the equivalent of $10,000 today then you’d only need to save 20 percent, including company matches.

If you’re comfortable with just a 75 percent chance of achieving your goal, you’d only need to save 11 percent if you’re not going to work in retirement, or just 6 percent if you do.