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Projecting Your Income Needs in Retirement

By William Murphy


If you want to retire comfortably, how much do you need to save before you can leave your job?

You’ve probably heard that you’ll need to replace a certain percentage of your income to sustain your lifestyle in retirement. Financial experts estimate that percentage could be anywhere from 60 to 90 percent, or even more. Reducing your income by a certain percentage will take into account the fact that there will be certain expenses you’ll no longer be liable for, such as payroll taxes, in retirement.

It’s a simple, common-sense approach, but it doesn’t always work because each of us have specific needs and plans for retirement. If you want to travel extensively once you retire, for example, you might need 100 percent of your income. While it’s advisable to use a certain percentage of your income as a benchmark, it’s also important to review your current expenses and to think about how they will change over time.

Estimating your retirement expenses
What type of annual expenses will you have in retirement? To determine how much to save before you retire, identify all of your expenses and project how much you’ll spend in each area. Here are some of the common retirement expenses you’ll need to consider:

  • Health-care costs not covered by insurance, such as deductibles, co-payments, and prescription drugs
  • Housing, such as rent or mortgage payments, property taxes, homeowners’ insurance, and property maintenance costs
  • Food and clothing
  • Insurance, such as medical, dental, life, disability, and long-term care
  • Transportation, such as car payments, auto insurance, gas, maintenance, and public transportation
  • Taxes, such as federal and state income taxes, and capital-gains taxes
  • Debts such as personal loans, business loans, and credit-card payments

Keep in mind that the cost of living will increase as you age. The average annual rate of inflation over the past 20 years has been about 2.3 percent, according to data from the U.S. Department of Labor. And your retirement expenses may vary over time. You may pay off your home mortgage or your children’s college education, while your health care and insurance may increase. It’s best to build in a cushion in your projected estimates to protect yourself from these variables.

Determining when you will retire
Estimating your retirement needs will not only depend on your annual income. Deciding when you’ll retire is a key part of the equation. A longer retirement will require more income to finance it.

Your decision on when to retire will center on your personal goals and your financial situation. You may want to retire at age 50 to pursue a personal goal, such as writing a book or traveling around the world. This may be possible if you benefit from a booming stock market or a substantial early retirement plan. As you make this important decision, keep in mind that retiring at 50 will be much more expensive than waiting until you’re 65.

Projecting your life expectancy
Another factor in the retirement equation, Murphy says, is your life expectancy. Living longer, of course, means you’ll have more years of retirement to fund. To protect yourself from potentially outliving your savings, you should estimate your life expectancy. Some possible sources to help guide you are government statistics, life-insurance tables, or a life-expectancy calculator. These estimates are based on your age, gender, race, health, lifestyle, occupation, and family history. Remember these are just estimates and there’s no way to determine precisely how long you’ll live. Since life expectancies have been rising, however, it’s advisable to project that you’ll live longer than you expect.

Selecting your sources of income
After you’ve calculated your financial needs in retirement, you’ll need to determine what sources of income are available to you. You may receive a traditional pension from your former employer that will pay you monthly benefits. And you will probably rely on Social Security benefits to fund part of your retirement. (You can get an estimate of your Social Security benefits by visiting Other sources of retirement income may include a 401(k), an IRA, annuities, or other investments.

Dealing with an income gap
In the best-case scenario, your income sources will more than cover a lengthy retirement. But if you find that you have an income gap, there are steps you can take to make up that shortfall. For one, you can cut your current expenses so you’ll save more for retirement. You can shift assets to investments that have higher potential to earn more, although those investments involve greater risk. And you can consider delaying your retirement, lowering your expectations (forget the second house in the Florida Keys), or consider working part-time. If you do face a shortfall, it’s best to consult a financial planner to help you figure out how to bridge that income gap.

William (Bill) Murphy, CFP is a VP and senior wealth advisor with Tompkins Financial Advisors. Contact him at or call: (607) 273-0037. Author disclosures: Some of this material was prepared by Forefield/Broadridge for Tompkins Financial Advisors. The opinions in this article are for general information only and are not intended to provide specific investment advice or recommendations for any individual.

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