One of the blogs I enjoy reading,GRACEful Retirement, had a post about a recent Wall Street Journal article on the shortfall in baby boomer retirement accounts. The article suggests being prepared for retirement means having about 85% of your working income and boomers are failing miserably. The comments to this article are interesting, and like Grace, many readers assert you DO NOT need 85% of your working income in retirement. And while I mostly agree, in reality, it depends.
There are far too many factors to consider in retirement for any specific figure or percentage to apply to most people. Before retiring, it's critical to understand your unique financial picture, but many people put off even thinking about retirement until it is almost too late. Over the years, I've talked to many people in their 40s and 50s who have not done any retirement planning whatsoever. Even sadder are people in their 60s who are "ready" and want to retire but can't because their finances are not quite where they need to be. The recent economic downturn has been bad for many, but especially bad if you've put off retirement planning and really want/need to retire.
Not only is it important to understand how much income will be at your disposal, but also what issues might impact your income. People with defined benefit pensions (e.g., teachers, state employees, police/firemen, etc.) have reliable, guaranteed monthly incomes based on a formula (e.g., years of service X age factor X highest salary). Some people will rely solely on Social Security, while others will depend on a combination of sources such as Social Security, company pensionS, 401k/457 accounts, and/or savings and investments. If retirement income is invested in stocks or real estate, market fluctuations will have an impact on cash flow. Taxes can be an unpleasant surprise if you are not prepared and will impact your net income.
In addition to understanding projected retirement income, you need to estimate your expenses. I estimated on the high side... and factored in 4% annually for inflation. If you will have a mortgage, higher medical expenses (e.g., insurance), plan to travel, or undertake expensive hobbies, even 85% of your pre-retirement income may not be enough. In my case, I am spending 3 times as much as I used to on travel. We also eat out more and spend more on entertainment and leisure activities than before retirement. We even spend more on groceries now that my dh tags along. But we still manage to live below our means.
In 2008, I retired with ~46% of my pre-retirement gross income, but since I am no longer contributing the max to 403b and 457 plans, nor do I have work-related expenses, I can live comfortably on this. The bottom line: my retirement net income is ~99% of my net working income because I planned it this way. However, before retiring I never spent anywhere close to 85% of my gross or net income so retiring was an easy adjustment, financially. It helped that a few years before retiring, I estimated my pension benefits, practiced living within that income and saved the rest.
Before deciding to retire, I formulated a budget that included a "retirement enjoyment" category. Travel, entertainment, dining out, and basically, everything that's a want vs. a need went into this line item. I didnít want to spend the next 25-30 years home-bound, unable to do the things I dreamed about because of an inadequate income, so I planned accordingly. It meant making choices such as downsizing, creating a realistically padded budget, and having an emergency fund to address the unexpected.
Retirement, no matter whether at 47 or 67, can be everything you want it to be if you understand your priorities, set goals, and make a plan to achieve them. The sooner you start, the better your chances of retiring when you are ready.