Key Points

  • Guidelines about the percentage of income to replace in retirement are only starting points for projecting how much to save.

  • The reality of retirement is that your needs—and associated costs—are unique and will change over time.

  • To determine what percentage will work for you, you have to dig into the details.

Dear Carrie,

I've heard that generally speaking you can get by on 70-80 percent of your annual income in retirement. Is that really a reliable estimate?

—A Reader

Dear Reader,

A lot of people would certainly sleep better knowing they had enough money to live comfortably in retirement. That's why we have approximations like the 70-80 percent guideline. They give people an estimate to work towards, which is a step in the right direction.

But a guideline is one thing—and reality can be another. So your question gets right to the heart of the matter: How much of your annual income do you really need to live comfortably in retirement? If only the answer were as simple as the question.

Guidelines are static

While I'm all for giving people a starting point, one limitation of guidelines is that they assume that life is a constant. Which is far from reality. For starters, in this instance are we talking about 70-80 percent of your income needs at age 40 when you might be raising a family, saving for college and carrying a large mortgage? Or your income just before retirement, when your financial obligations are most likely very different? Should it be based on your peak earning years? And are we talking about gross income in a single year or net income? (Generally, it's considered gross income, not your take-home pay.)

Plus, the result of using a single year's income as a basis might be that you end up with less money than you need for the standard of living you envision in retirement—or conversely it might have you struggling to save more than you'll actually need.

Retirement is dynamic

Another assumption is that retirement expenses will be constant. That, too, isn't accurate. While certain essential costs of living may remain the same—and some costs may go down, such as work expenses, taxes, and mortgage payments—the way retirees choose to spend time during different phases of retirement may require more or less income.

For instance, you may have heard the concept of the "go-go," "slow-go," and "no-go" years. Often retirees spend more in their early retirement years on things like travel and entertainment, and may need 100 percent or more of income to live the lifestyle they want. The middle retirement years may be focused closer to home, with more nights in than dinners out, and expenses may go down. Costs in the later years of retirement can often be a function of health and longevity, with medical and long-term care costs warranting a larger percentage of income. Retirement spending isn't a straight line.

Research has shown that while some retirees need more than 80 percent of their previous income throughout retirement, others can get by with closer to 50 percent. And those percentages can fluctuate within the course of a retirement. It's very individual.

Your situation is unique

General guidelines can't factor in things like your risk tolerance, size of your family, or your lifestyle. These are unique to you. So bottom line, to understand how much you will need to have a comfortable retirement, you have to get specific.

Start by doing a sample budget. You might divide it into three categories: needs, wants and wishes. Needs are the things you can't do without like housing, everyday living, health care, insurance and taxes. Wants are the nice-to-haves like travel and nights out. Wishes are where you can let yourself go—include all the things you'd do if you had unlimited time and money. Now it's up to you to decide what's realistic.

With your lists in front of you, add up your sources of reliable retirement income: Social Security, a pension, or income from an annuity. Your savings will have to make up any difference between the total of your income and your spending.

The percentage of income you need to replace in retirement to cover your projected expenses is also a function of how much discretionary income you have. If money is tight and you use most of your income to cover essentials, chances are you'll have to replace a larger percentage of that income in retirement just to get by. If, on the other hand, you've had the good fortune to have a fair amount of discretionary income, you may have more latitude in deciding how you might cut back in retirement and consequently replace a lower percentage.

Boost your confidence with a personalized plan

To get back to your question, I think it's okay to use the 70-80 percent guideline if you're pretty far from retirement and only looking for an approximation. Using a higher percent guideline is better if you're more conservative. Either way, the closer you get to retirement the more specific you need to be.

To me, the key to confidence is to plan ahead. Recent research by the Employee Benefit Research Institute (EBRI) found that only 42 percent of people had actually tried to calculate how much they'll need to save to live comfortably in retirement. And that's where the uncertainty comes in. On the positive side, Schwab's 2019 Modern Wealth Survey found that 56 percent of people who were planners felt "very confident" they would reach their financial goals compared to only 17 percent of non-planners.

So to really understand how much retirement income you'll need, dig into the details. Plug some numbers into a retirement planning calculator. Consider talking to a financial planner who can help you with how much you can spend, discuss how inflation and taxes come into the picture, and put together some "what if" scenarios based on your personal situation.

In the meantime, pay off your consumer debt, consider reducing fixed costs like a mortgage, and even experiment with living below your means. That way you'll not only be able to save more now while you have your full income, you'll get used to living on less. That may be the ultimate way to personally understand what percentage of your income will be enough to live comfortably and confidently through all the phases of your retirement.

Have a personal finance question? Email us at askcarrie@schwab.com . Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact  Schwab.

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