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How much income do you need in retirement? It’s one of the most important questions in financial planning. Given its importance, it gets relatively little attention. The standard way to determine how much income you need in retirement is called the replacement ratio. The replacement ratio tells you how much of your income you need to replace in retirement relative to your current income.

Replacement ratio= Retirement income ÷ Current income

If you currently make $100,000 per year and you wanted to have a $70,000 income during retirement your income replacement ratio would be 70%. This is the standard rule of thumb used in the financial services industry.

How to determine your income replacement ratio

While a 70% income replacement ratio is the industry standard, it’s important to determine how much of your income you need to save in retirement. There are two major questions you need to answer.

  1. What costs will go away during retirement?
  2. What costs will increase during retirement?

If you can accurately forecast how your cost of living will change during your golden years, you can more accurately determine your income replacement ratio.

What costs will go away during retirement?

Childcare costs. It’s no secret that having children is expensive. The USDA breaks down the cost of raising a child as follows.

  • Age 0-2: $12,680
  • Age 3-5: $12,730
  • Age 9+: $13,180
  • Age 15-17: $13,900

If you currently have children under the age of 18, the cost of raising that child is likely to be the largest expense that will go away during retirement.

Mortgage payment. If your mortgage is fully paid off by the time you retire, your housing costs will drop by the amount of your mortgage. You’ll still have to pay for property taxes and maintenance which both tend to be around 1% of the value of your house per year. If you retire with no mortgage and a house worth $500,000 you would still need to budget for at least $10,000 per year plus your heating and utility costs.

Saving. Once you retire, you no longer need to save for retirement. Ironically, the more you save during your working years, the smaller your income replacement needs to be during retirement. That is because there is an inverse relationship between your saving rate and your income replacement ratio.

If you were saving 20% of your income during your working years, that is 20% of your income that does not need to be replaced during retirement. I should make clear this is referring specifically to your retirement savings. You’ll still need to save for specific purposes like vacations during retirement.

What costs will increase during retirement?

This is much more difficult to forecast as it depends entirely upon your lifestyle. However, here are three expenses that generally increase during retirement.

Travel. This is the obvious one. When you have nothing but free time, many people decide to spend more money on travel. The more you value travel, the more this cost will increase in retirement.

Eating out and other social costs. When do you spend most of your money during your working years? For most people the answer is on weekends and vacation. When we have time to catch up with friends and family, we are more likely to go out to dinner, for drinks or to other social events. You need to ask yourself if every day was a Saturday how would your social life change and how much would that cost?

Healthcare. This is likely the largest increased expense for retirees, especially in the U.S. How much your healthcare costs increase will vary based on where you live and your health during retirement. It is something you should start researching more closely as you plan for retirement.

How much you need to save to fund your retirement

To determine how much, you need to save each month to fund your retirement you only need to know the following variables.

  • Age
  • The year you want to retire
  • Current Income
  • Your desired Income replacement ratio
  • Current savings
  • Workplace pension or retirement plan

An Example

Let’s say you are 35 years old making $85,000 per year and want to replace 70% of your income when you retire at 60. Let’s also assume you have $60,000 in retirement savings right now. Finally, I’ll assume your retirement portfolio earns an annual return of 5%.

How much do you need to save?

Scenario 1: No workplace pension or retirement plan.

In this scenario, you are completely on your own when it comes to retirement savings and to reach your retirement by age 60 you would need to save $2,147 per month to reach your retirement goals.

Scenario 2: No workplace pension but a matching retirement plan

If you are lucky enough to have a defined contribution retirement plan or a 401k, the retirement saving math gets much easier.

Let’s say your employer matches up to 5% of your salary into a retirement saving plan. Both you and your employer contribute $4,250 per year for a total of $8,500.

You would still need to save $2,147 per month, but your employer would be paying $354 per month through the matching contribution. You would still be on the hook to save $1,793 per month (including your contribution to the workplace retirement plan)

Scenario 3: Defined Benefit (DB) pension plan

DB pensions are the ultimate retirement planning tool. A DB pension guarantees you a percentage of your income in retirement.

If you had a DB pension that would replace 40% of your income at age 60, then your personal savings would only need to replace 30% of your income (70%-40%).

In this scenario, you would only need to save $720 per month to top up your DB pension in retirement.


To determine how much you need to save in retirement you need to determine the following.

  • How much of your current income do you want to replace in retirement? This will be determined by how you believe your costs will change in retirement.
  • Years to retirement.
  • Current retirement savings.
  • Whether or not you have a workplace retirement plan and what type of plan it is (matching contributions, or DB pension).

Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.

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