How Much Do You Really Need to Retire?

Suzanna de Baca -- Expert Business Source, 10/27/2008 9:51:00 AM

“Will I ever be able to retire?” This is the question I’m hearing over and over from people of all ages, even those in high income brackets. In an Expert Business Source column last week, entitled, “Economy Changes Retirement Plans for Even Generation X,” I stressed that even for young or middle aged individuals, when you retire will depend on how much you save and how much you spend now.

But let’s take the retirement question one step further: how much will you need? In addition to what you save and spend now, it seems that the amount you’ll need in retirement largely depends on your income now. A new study by Aon Consulting shows that the more you earn, the more you’ll need.

A long accepted rule of thumb among financial advisors is that in retirement, you will need 70-80% of pre-retirement expenses on an annual or monthly basis. This theory is based on replacement-ratio studies done for 20 years by Aon Consulting and Georgia State University. The logic behind this is that in retirement, your taxes will go down since you have less income, and you will not be plowing money into 401(k)s or other retirement plans. Many planners have also traditionally factored in the idea that at some point you will have paid off your house and therefore the mortgage expense will have disappeared.

Taking a realistic look at retirement spending today, however, experts are rethinking their established theory and are speculating that retirees will have expenses higher than expected. A study released this year by Aon indicates that if you’ve enjoyed a fairly high standard of living and income level, chances are you’ll need nearly 90% in retirement.

“That's largely because your tax bill won't go down as much as you'd expect, in part because up to 85% of Social Security payments are taxable at higher incomes,” writes Money Magazine senior editor Walter Updegrave in a October 24, 2008 article on CNN Money entitled “Got enough to retire? Think again.” Updegrave references the new Aon study and points out that “for high earners, Social Security kicks in less.”

If you have a fairly high income even in retirement, the idea that your tax bill will be lower is unfounded. Basically, if you have any kind of income – social security, earned income, or investment dividends or interest – that is anywhere near $100,000 (or even less), you’ll still be in the highest tax bracket.

What does this mean for you if you are a high earner? The answer is fairly simple, but requires effort: it means you need to save more for retirement than you may have previously thought. In times like these, increasing savings sounds painful, but erring on the conservative side of retirement estimates may prevent a shortfall later.

What can you do now? In addition to socking away more in savings, including your retirement plan and taxable savings, Updegrave recommends creating a preliminary retirement budget now. No matter what your age, you can look at estimated expenses in retirement even if life’s circumstances may change. A early draft of a plan may be better than no plan at all. You can go to Bankrate.com or many other sites and find numerous retirement calculators to help you determine how much you’ll need, the impact of inflation, and your estimated social security benefits.

The current economic crisis, as the media is keen on calling it, has Americans more focused on money and retirement than ever. Even younger workers are wondering if this downturn will affect them and their future retirements. Whether or not you can retire at age 65 or younger and maintain your standard of living will depend on many things, but primarily on how you live now. So, as I said in the last column, start saving and stop worrying.

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.