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When it comes to estimating your retirement income, a common rule of thumb is that you’ll typically need about 80% of your work income to maintain the same standard of living. This comes from a number of factors, including the fact that you won’t need to set aside money for retirement anymore.
This number is certainly flexible and will vary from family to family. If you’re currently living well below your means, for example, you can probably comfortably afford less. If you’re living paycheck to paycheck, you may want to plan for either more income or fewer expenses. But 80% is a good place to start.
For example, let’s say you’re 48 years old and currently make $95,000 per year. With $430,000 in a 401(k), what type of retirement budget should you plan?
Here’s how to think about it. You can also consider using This free tool To align with a financial advisor to discuss the details of your situation and how to plan accordingly.
Typically, we start with your money and build a budget from there. But this time, let’s start with your spending. Here, she makes $95,000 a year. So, with our rough estimate, we’ll start by assuming that you’ll need about $76,000 per year/$6,350 per month to maintain your current standard of living ($95,000 * 0.8).
The math doesn’t end there though.
Here, we have a few key moving pieces. First, at age 48, you may have many expenses that you shouldn’t expect in retirement. Notably, spending or saving priorities related to dependents are likely to decline in retirement. For example, spending on your kids or saving for college is a large portion of your budget that you probably won’t need in retirement.
On the other hand, you have approximately 20 years before full retirement age. It’s a long time, with plenty of room for your income and lifestyle to grow. This makes predicting your future needs more difficult, because it is entirely possible that your standard of living will depend on more than $95,000 per year by the time you turn 67.
In general, do your best to anticipate the expected changes in your life and needs. Beyond that, we can start by planning to maintain your current standard of living at your current income level.
Next, remember the long-term costs associated with retirement. Notably, your budget should always anticipate taxes and inflation.
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