How Much Should I Save for Retirement? – Part 1: How Much Income Will I Need in Retirement?

Corey —  August 26, 2009

The first step in figuring out how much you need to save for retirement is to determine how much income you’ll need in retirement. This number will affect how much you need to have saved up on the day you retire. While you won’t know exactly how much you’ll be spending when you’re retired, you need to come up with the best estimate possible.

Step One: Forget the 70%, 80%, 90%, 95%, or any other % Rule

Any rule that says you’ll need a certain percent of your pre-retirement income is complete nonsense. Everyone’s situation is different. Some people will need only 40% of their pre-retirement income, while others may want 120%. Your retirement income needs strongly depend upon your personal situation. By using one of the many percent rules, you’ll be shooting for a much higher income than you actually need – or worse, you won’t save enough. So forget all these rules, and let’s look at your personal situation.

Step Two: Look at Your Current Spending

If you haven’t already been tracking your expenses, now is the time to start. Trying to predict your future expenses is going to be extremely difficult if you don’t even know what you’re spending right now. There are plenty of ways to track your expenses, some easy and others more time-consuming. I’ll let you choose the method you like best. It doesn’t really matter as long as you can get a fairly accurate picture of where your money is going.

It’s also important to have a clear understanding of your health insurance. There a number of different plans available, but a good amount of research is absolutely crucial before going through with any of them. Depending on your plan, you may have access to prescription drugs. This becomes increasingly important as you become older. Thankfully, you can still order your medications via online pharmacy. Not only is this less expensive than buying medication at a drug store, but it is also much more convenient, as everything goes straight to your home.

Step Three: Figure Out Which Categories Are Likely to Change

The next thing you’ll want to do is determine which parts of your budget are likely to change when you’re retired. Figure all of this stuff in today’s dollars (what it would cost today). Inflation will be accounted for later. Here are a few possibilities:

    • Housing – If you have a mortgage now but you won’t in retirement, make sure you take that out of your retirement income needs. You’ll still have property taxes, utilities, maintenance costs, and homeowner’s insurance. If you’re going to sell your home and rent in retirement, don’t forget to account for that. If you rent now, will you own a home by the time you retire? If so, estimate those costs by talking with people who live in homes similar to one you’d like to buy. If not, figure on still paying rent and renter’s insurance during retirement.


    • Kids – If your children will be on their own by the time you retire, you can cut out any related costs when figuring your retirement income needs. You may even be able to plan on downsizing your home after your kids have moved out – saving you more on housing.


    • Job – If you won’t be working, forget the commute, business clothes, and any meals you bought with co-workers or clients. If you’ll be working part-time, estimate what your related costs will be.


    • Savings – If you’re retired, you most likely won’t be saving for retirement. You’ll still want to set aside some money for emergencies and other goals, but you can cut this spending category way down if you’re currently saving a lot.


    • Insurance – Life and disability insurance are designed to cover the risk of premature death while you’re working. If you don’t need to work during retirement, you can cut out these costs as well (unless you need the life insurance for estate taxes). Health insurance may go up or down depending on your current situation. Medicare Part B costs about $1,200 a year right now with a $135/year deductible and 20% coinsurance after that. If you’ll have 40 quarters of covered employment, you won’t pay Part A premiums. Medicare Part D (prescription coverage) currently costs about $360/year in its basic form and about $760/year if you want some gap coverage. Any Medigap policy premiums will depend on the coverage you buy.


    • Health Care – If you have or develop a chronic illness, your health care costs may go up quite a bit in retirement. Medicare will cover most of the basic stuff, but if you have specific conditions you’ll either need to pay for related costs out of your own pocket or cover them with a Medigap policy. If you’re healthy now, you may not need to account for increased health care costs in retirement. This should be additional motivation to start living healthy now before it’s too late! You’ll save a lot of money and enjoy life more.


    • Senior Discounts – Some of your current costs may go down in retirement because of senior discounts. Golf may be cheaper, dining out may cost a little less, and public transportation may provide discounts as well. You might also be able to get lower rates on insurance policies. Don’t get too caught up trying to figure these things out. It largely depends on what you’ll be doing in retirement and whether or not a discount will be available.


    • Travel – Will you travel more or less in retirement? Many people travel a lot in the first few years of retirement, but return to their regular habits after that. Don’t forget the senior discounts that may apply and the fact that you can travel at off-peak times to save even more money. You’re not in a hurry either, so maybe you’ll drive instead of flying.


    • New Hobbies/Activities – Will you be taking up any new past-times in retirement? How much do you think they’ll cost? Will you stop doing some of the things you do now, and how much will that save you? Maybe you’re planning on volunteering a lot, which means you’ll have some transportation costs to account for. If you’ll be planning missionary trips, include those here or in the travel category.


  • Income Taxes – Don’t include your income taxes (federal, state, or local) in your required retirement income. We’ll account for some of those in step four and the rest in Part 2 of this series.

This list is not all-inclusive. Some of these categories won’t apply to you, and I’ve missed some that probably do. You’ll need to consider your own situation and adjust accordingly. Once you’ve figured out what will likely change for you in retirement, come up with an annual retirement income need.

Step Four: Deduct Any Income Sources

Next, you’ll want to add up all your income sources in retirement. If you’re close to retirement, you might be able to include Social Security – younger people would do best not to count on Social Security yet because of the uncertainty. Pensions, business income that will continue, and any part-time employment are all possible sources of income in retirement. Take your annual retirement income need and subtract your after-tax retirement income. This will give you your target retirement income (TRI), which we’ll use in Parts 2 and 3 of this series to determine how much you should be saving for retirement.

Stay tuned for Parts 2 and 3 of this series to figure out how much you should be saving for retirement. The best way to make sure you don’t miss a thing is to sign up for free updates to Provident Planning.



Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.

2 responses to How Much Should I Save for Retirement? – Part 1: How Much Income Will I Need in Retirement?

  1. Art Prunier (aka ThePrune) July 23, 2012 at 7:15 PM

    Your comments about “income replacement percentages” are right on!  What I find amusing is that your approach to “personalizing” retirement income needs is in fact that same personalization approach recommended by the Georgia State University / Aon Consulting team that publishes these income replacement percentages every 3 years.  That’s right!  The publishers of the percentages actually recommend that they be “personalized” before being used by specific individuals! But this detail seems to get lost in the general news releases or when used by retirement planners with less extensive training.

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