How much income will you need in retirement? Nest eggs, retirement buckets, investment accounts – whatever you might call the lump sum of money you are saving to live off in retirement -will need to fund your retirement income for around 30+ years. But how do Lockheed pre-retirees determine how much income they will need to take care of those retirement expenses?

70-80% Rule

A general rule of thumb in the retirement planning world is that you will need between 70% to 80% of your pre-retirement income to live off of. The thought behind that number is that you won’t have the normal expenses you would have commuting to work. Gasoline, car maintenance or public transportation expenses might be significantly lower depending on what your commute is like when you are working.

So if you had an after-tax income of $10,000 (how much is deposited into your checking account after things like health insurance, 401k, taxes, etc. are taken out of your pre-tax pay) you should be able to live off of $7,000 to $8,000 a month.

The issue with that estimate is that most people when they retire might want to spend more time doing things they enjoy early on in retirement. Maybe you weren’t able to play as much golf or travel as much when you were working, but would like to when you retire. Some of those expenses you might avoid not commuting might be moved over to the “fun” category.

Budgeting…not as scary as it sounds

A better method in determining what type of retirement income you might want to live off of would be to work through a retirement budget. I know budgeting sounds about as fun as a trip to the dentist for a root canal, but it’s a good way to get a better grasp on what your retirement will look like.

Don’t hide from your budget.

For many Lockheed employees when they are approaching retirement, their income has exceeded their expenses for quite some time, and budgeting has probably not been a priority. Getting a budget together, even if it’s a basic one done on a legal pad, can help determine what income you’ll need when you retire.

You’ll also need to take into account how your expenses will change. Will you sell your home and move to that lake house like you’ve always wanted? How will your health insurance expenses change? It’s important to talk through these questions (with your spouse too if you have one) before figuring out what you’ll need later in retirement.

Once you figure out how much you’ll need to live off of you’ll need to then figure out if you have enough to cover that income need. Don’t forget to include social security and your Lockheed pension (if you have one) to reduce what you’ll need from your investment accounts.

Inflation

You’ll also need to include inflation – the rising costs of goods you’ll need to live on – to your retirement calculations. The costs of things you buy tends to increase around 2-3% on average (according to the Bureau of Labor and Statistics). Think about the price you paid for your first car or first home. Or one that’s easier to think about…how much a stamp cost you 30 years ago ($0.30 in 1989).

You can usually find a few basic calculators on the web that might do factor in inflation for you, but working through these calculations with a financial planner is a great way to get a second pair of eyes on your numbers. You can also check with the folks at Empower as they have a few web tools that might help as well.

Pulling the trigger on retirement can be somewhat of a scary event. But with the right amount of planning, you’ll be able to enjoy more of that retirement if you know you have your income covered.

Related Links:

Have I saved enough to retire?

How do I plan for retirement?