It’s common to discuss desired annual retirement income as a percentage of your current income. Depending on whom you’re talking to, that percentage could be anywhere from 60 percent to 90 percent, or even more. The appeal of this approach lies in its simplicity, and the fact that there’s a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you’ll no longer be liable for (e.g., payroll taxes) will, theoretically, allow you to sustain your current lifestyle.
Healthcare costs not covered by insurance: Deductibles, co-payments, prescription drugs
Don’t forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2 percent.1 And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Finally, have a financial professional help you with your estimates to make sure they’re as accurate and realistic as possible.
Try to cut current expenses so you’ll have more money to save for retirement.
Shift your assets to investments that have the potential to substantially outpace inflation (but keep in mind that investments that offer higher potential returns may involve greater risk of loss).
Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, for example).
1Calculated from Consumer Price Index (CPI-U) data published by the Bureau of Labor Statistics, January 2021