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How much money do you really need to retire?

Are you planning your retirement? There are lots of variables, dollar figures and percentages to factor in when determining how much you'll need to save for your golden years.

By MSN Money Partner Jul 31, 2013 4:33PM
This post comes from MSN Money columnist Liz Weston.

 Egg in nest (© Brian Hagiwara/Brand X/Corbis/Corbis)Dear Liz: None of the Web-based tools I’ve seen really get at the heart of the problem of how much I really need in retirement.

For example, if I am diligent and save 20% of my income (I earn over $150,000), why would I need to replace 95% or even 80% of my income to maintain my standard of living in retirement? If I subtract the 20% going to savings, another 10% for the costs of working (clothes, lunches, gas) and reduce my income tax 5%, shouldn’t I be living the same lifestyle at 65% of my current income?

Now, if I have a pension that will replace 10% of my pay, and if Social Security benefits for my spouse and me replace 30%, don’t my investments have to produce only the remaining 25%? Or am I missing something?

Answer: The further you are from retirement, the harder it can be to predict how much you’ll need when you get there.

Financial planners often use an income replacement rate of 70% to 80% as a starting point. It’s just that, though. Planners will tell you some of their clients’ spending actually increases in the early years of retirement as they travel and indulge in other expensive hobbies. Those who are frugal or used to living well below their means are often able to retire comfortably with a much lower income replacement rate.

A big wild card is the cost of medical and nursing care in your later years. The U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey shows average overall spending tends to drop after retirement and continues to decline as people age. Serious illness or a nursing home bill can cause spending to surge late in life, however, leading to a U-shaped spending pattern for many.

Taxes also are hard to predict. While most people drop into a lower tax bracket once they stop working, those with substantial retirement incomes and investments may not. Tax rates themselves could rise in the future, even if your income doesn’t.
Social Security benefits may change, as well. Although it’s highly unlikely the program will disappear, some proposals for changing Social Security reduce checks for higher earners.

Once you’re within a decade or so of retirement, you should have a better handle on what you’ll spend once you quit work. Before that point, err on the side of caution. Assuming a higher income replacement rate gives you wiggle room once you’ve retired -- or the option to retire earlier if it turns out you need less.

More from Liz Weston:
Jul 31, 2013 7:55PM

I retired at 59 11 years ago.  The information I judged was most applicable convinced me that I needed 70% of my income at that time. I was a construction worker who carried a lunch pail for 40 years.

What everyone needs to consider is that how much you need depends what you want to do.  My wife and I have been very fortunate in that all our needs are being met. 

I always think about what may happen with the cost of living and inflation as we continue to age. 

We actually receive more income at this time then we ever did while we were working.  Life has been very good to us.  Love your spouse, tell your children that you love them and are proud of them.

Jul 31, 2013 7:26PM
I retired at 58...15 years ago. I have a small pension, SSI, and personal savings/investments. As I look back on what I feel was my most important consideration for retirement planning, without a doubt, it was budget and spending tracking. Using this data, I predicted we would be able to pay our daily living expenses with SSI, our insurance premiums with the pension, and supplement the rest with savings. This prediction remains accurate today. We live on roughly 50% of my pre-retirement income. We have no debt, no mortgage, and live a very comfortable retirement life.

We budget as we always have, allowing us to set aside money each year for big things like cars. This allows us to pay cash. The only surprise has been the expense for medical needs, including LTC and insurance premiums (like supplements). We are both healthy, yet these expenses consume about 20% of our retirement income.

Jul 31, 2013 8:47PM
The key is to go into retirement with no debt, including having the house paid for.  Only use credit cards to travel or for major items to accumulate points and pay it off every month.  Plan major purchases and save in advance - separate account for a new car that you are going to buy in 2 or 3 years.  If you are retired you have time to plan everything and your travel becomes discounted if you do it right.  Do all of this and you will find that you have money for annual giving to charities that you did not have before.
Jul 31, 2013 11:37PM
Quit worrying about how much money you need to retire.  Quit worrying about being totally out of debt.  When it's time to retire you'll have enough.  Give some long and serious thought to how you are going to spend your time.  Perpetual travel becomes a bore but if that's your cup of tea go live on a cruise ship.  You can only play so many rounds of golf or play so many games of bingo.  You will become less mobile with age.  Plan on it.  Carve, paint, build furniture or doll houses.  Learn to do something creative, productive to give yourself a sense of accomplishment.  Boredom will depress you.  Boredom will kill you.  Your ability to use time is far more important than how much play money you have stashed.
Jul 31, 2013 8:42PM
The best you can do is look at history for an indication as to what inflation will be in the future and that will still be a crap shoot. Health care costs and taxes are probably harder to predict for the future, but at a point in everyone's life you have to draw a line in the sand and tell yourself it is time to retire and live the rest of your life. At 57, I recently retired from a 37 year mining career and I have saved and have a pension and a 401k and IRA and all that and I am not sure it will be enough to live on but it was time and I knew it in my head and heart. Maybe I have been luckier than some to have been afforded such good retirement savings opportunities, who knows,

I went back several years and looked at what my net pay was for each year after paying all the income taxes, SS taxes, medicare taxes, contributions to 401k, personal savings and such. Right now I can replace that net income easily but who knows what the future holds. That may have been the wrong way to look at retirement, but it made since to me. My net pay was what I lived on for the year and I did most everything I wanted to do.
Jul 31, 2013 8:59PM
So far, I get a discount at Denny's.
Aug 1, 2013 1:18PM

I was always a good saver. I started saving in my late teens and early twenties. I invested most of my money in savings and checking accounts, savings bonds, and CD’s. The interest rates were much higher when I was in my twenties. I was getting a good amount of interest on my investments. I had no debt. I put myself through school and worked two full time jobs for a number of years and worked a full time and part time job later in life.


I seriously started thinking about my retirement in my thirties. Businesses started doing away with pension plans and started replacing them with 401K plans. IRA’s were becoming widespread and discount brokerages were becoming popular. I started to invest in equities, bonds, and other financial instruments. The Internet was still years away so it took a lot of effort to do the research and invest in the stock and bond markets. By trial and error I became very good at investing and managing my money.


I am in my late fifties and I am on track to reach all of my financial and investment goals. As an investor I learned it is wise to have short-term and long-term investment and retirement goals. I have a rainy day fund for the unexpected. I am disciplined with my finances. I try very hard contributing the maximum amount in my retirement plans and take full advantage of my employer’s contributions to those plans. Each quarter I take a careful look at my investment and make changes to my plan as needed.  


I am sure medical costs are going to be my biggest expense when I do retire and I have planned as much as possible for that. I help my parents with their finances. Their medical costs by far are their biggest expense.  I learned a lot from my parents. They both worked until later in life. They retired with no debt and have always lived within their means. They planned for the unexpected.  Their reward for working so hard and saving is living comfortably in a home that was paid off year before the retired.


When I do retire I want to live comfortable and be able to do whatever I like. I plan on traveling more and spending quality time with my family and friends. I want to enjoy myself. On both sides of my family we have been blessed with long life. I am in good health and I am active. I still work over fifty hours each week and I enjoy what I am doing.


Every ones retirement needs are different. The best advice I can give is to have short-term and long-term investment and retirement goals. To have a budget and stick to it. To have a rainy day fund for the unexpected. To live within your means and stay out of debt. The earlier in life you start saving and investing the easier it will be when you get closer to retirement age.  Have a plan and stick to it.



Aug 1, 2013 7:21AM
Useless article.  Needs more substance.  I would give it a grade of D.
Jul 31, 2013 8:33PM
Who is the moron who wrote tis article.  There is no content.  Who approved it?
Aug 1, 2013 12:48AM
"Financial planners often use an income replacement rate of 70% to 80% as a starting point."

If you pay-off the mortgage right around retirement and can continue employer-subsidized health insurance, 50% of your working income might produce more spending money than you ever had.

If you were saving 15%-20% of your salary as you approached retirement, plus the fact you pay no FICA taxes (7.45%) in retirement means that means you only need to replace 72.55% to 77.55% of your total salary even if everything else was equal.  Since, as discussed below, you will likely pay NO tax on Soc.Sec. if you have an avg. to somewhat above avg. retirement income, that easily pushes the max. down to 70% or less - everything else being equal.  The only major "being equal" potential problem should be health insurance.

If you get to continue your partly-subsidized health insurance (which often becomes your Medicare Supplemental) from employer or union health insurance or the discount due to very-large-employer rates that can mean your health costs are roughly the same when working - depending on how Medicare coverage compares to your working insurance.

If you pay-off the mortgage close to the time you retire, that can knock-off over 20% of the income you need.

Note that if you take 1/2 your Soc.Sec. income plus your non-tax-sheltered retirement income and the total is less than $25K single or $32K married, you pay NO income tax on Soc.Sec.  So if you get $1300 month Soc.Sec. plus a taxable pension of, say $2000/month, that formula results in 1/2 x $15,600 + $24,000 = $31,600.  If you're married that means tax-free Soc.Sec. so you pay income taxes on $24,000, not the actual $39,600 you make.  No taxes on $15,600 and no FICA taxes (7.45%) on all $39,600 makes that the equivalent of earning about $46,000.

Jul 31, 2013 10:10PM

When I retired, I thought I was in very good shape financialy BUT I ended up losing about 20% of my savings in the stock market due to a broker who made some bad investments. It seems like every month food goes up and my electric bill jumps. Savings that do not make any income will run out faster than we realize.  I know that during my working career I did the very best I could do, I lived VERY frugal and never, not even once bought on credit except for my house. I always drove old cars and did not eat out very often. I never planned that my savings would not make any money for me and dwindle over time. I just hope that I do not outlast my money!

Aug 1, 2013 1:48PM
A wise old man gave me the best retirement advise I have ever heard. "Retire and move to where you vacationed most of your career." I followed his advice when I retired and have been enjoying a perpetual vacation for almost 15 years.

Of course, retiring with no debt and staying out of debt are very important as well.
Aug 1, 2013 8:33AM

Trying to plan for the future?  Step one is to understand where you are right now.  On average, how much are you spending each month at this point?  You are focusing on income and assets.   Shift your attention to spending and debt.   That's the side of the ledger the financial crowd doesn't like to talk about.   They make their money on the asset side. 

Aug 1, 2013 12:54PM
Lets hope there is a future for this country.
Aug 1, 2013 1:52PM
Whoever wrote that article has a firm grasp of the obvious
Jul 31, 2013 8:02PM
The mistake is worrying about medical costs.  For me, no way am I wasting any money to stay on this messed up planet.
Aug 1, 2013 3:00PM
Shouldn't an article titled " How much money do you really need to retire?" actually tell you how much money you need to retire?
Aug 1, 2013 1:00PM
Aug 1, 2013 1:02PM
"The further you are away from retirement, the harder it can be to predict how much you'll need when you get there?"

--Kermit The Frog
Aug 1, 2013 8:08AM

Someone who earns $150,000 when the average income is $34,000 should have everything paid for when they retire.  They have enough money to  max out retirement funds, too.   


If you have a home paid for and enough to pay taxes on it for several years that is real security.  You will never be thrown out on the streets.


401K withdrawals plus Social Security benefits after retirement puts many in a higher tax bracket. Ordinary income taxes are charged for 401k withdrawals instead of capital gains.   Savings for the unexpected kept outside of the 401k the last couple of years before retiring could keep you from having to sell 401k investments in a bad market.       Doing that may not be such a good idea if Bernanke is funneling money to the stock market.

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