Financial Planning for Generation X & Y Women
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Expert Q&A Archive

How much of your income should make up your retirement base?
My question is this, when you're considering your retirement age-- normally people [retire at age] 62 to 65, but if you wanted to retire earlier than that, would it still be that same rule of thumb -- would you still be looking for 100 to 135% of your income as a part of your retirement base or should it be more?
Steven Rodriguez:
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The rule of thumb I'm familiar with claims that you will need about 70% of your pre-retirement income to maintain your lifestyle in retirement. While you will probably save some money currently being spent on work-related items (such as formal clothes and commuting), other costs go up in retirement (health care, hobbies, etc). 70% maybe a useful rule of thumb, but some people find 50% is plenty while others feel they need 100%.
Gary Silverman, CFP:
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Personally, I don't like using a thumb rule to determine how much income you need to replace at retirement. I'd rather actually know. So, to determine the amount needed, simply create a retirement budget for yourself and see. To do this, it is often easier to begin with your current budget and then change each line item as you think it will change in retirement.
Michael A. Masiello:
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I'm not sure where you got the 100-135% #'s. Usually we use 70-80% of current income needed in retirement. Keep in mind lots of variables go into this number. You may also find the Rule of 25 helpful. Multiply your income need by 25, and that's the amount you'll need in savings to retire and draw down a reasonable rate, i.e. 4%, without invading principal. Here again, pensions, part-time income, and Social Security will impact the numbers.
Martha Fortune O'Brien:
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Good question. You are onto something. The longer you live in retirement, the more you will likely be negatively impacted by rising prices. If you start early retirement with 100% of your pre-retirement income, you would either want a way for that income to rise or you would need assets that would be invested for growth to cover inflation as prices go up and your income stays fixed. Payments you might receive from a pension plan are not likely to increase over time. Most stay fixed for life.

Social Security has gone up historically much less than the prices of goods and services needed to live. Reform will be coming for Social Security that will likely reduce benefits further. Nobody knows for sure. I use calculations to determine the extra amount of investments needed at the start of retirement to supplement income in later years when inflation has reduced the power of the fixed income. You should be working with someone who shows you how your spending needs will be met throughout your life expectancy from all sources available to you.

[Editor's Note: Cindy Hounsell, President of the Women's Institute for a Secure Retirement (WISER), stated during the September 30, 2009, Wi$eUp teleconference call, that at WISER they say you need at least 100% of your current income, not 60% or 80%, because of longevity.]