How much income will you really need at retirement?

The common rule of thumb is 85 percent of what you earn immediately before retirement, a figure subject to massive quibbling.

Readers who responded to my inquiry about "Living Lite," for instance, said they were happy living on a fraction of their pre-retirement income. Some argued that a simpler life cost half as much as a working life. Depending on where you start, this needn't be heroic. If you're earning $150,000 before retirement, living on $75,000 after retirement will be a lot easier than going from $40,000 to $20,000.

Other readers tend to raise the ante. "We'll need more money when we retire because we want to travel," some say. Still others cite rising health care expenses as a reason to need more income in retirement.

The best starting point for any discussion is the Georgia State University RETIRE Project, an acronym for Retiree Income Replacement Project.   Done by Dr. Bruce A. Palmer at the J. Mack Robinson College of Business, the study is a regular examination of how taxes and expenditures change at different income levels from working to retirement. Rather than make guesses about what people will do in retirement, he simply asks what income will be needed to support the same level of actual consumption a household had while working.

The newest study reflects the tax laws in effect for 2004 and updates the study done in 2001. Today, a $30,000 single earner couple needs to replace 84 percent of income. A $50,000 to $60,000 couple needs to replace 79 percent of income, and a $90,000 couple needs to replace 82 percent of income. A two earner couple will need to replace somewhat less: 84 percent of $30,000, 77 percent of $50,000 to $60,000, and 78 percent of $90,000.

What's important here is that the 85 percent rule of thumb is a bit high for middle-income households.   If your income is $50,000 to $70,000, 75 percent is more accurate.

So what?

Well, a 10 percent difference turns out to be a big chunk of nest egg. For a $60,000 household, 10 percent is $6,000 a year. That, in turn means your nest egg can be $150,000 smaller. (This assumes a sustainable withdrawal rate of 4 percent a year.)

That's not small change.

The other big factor is Social Security.

Every dime in Social Security benefits reduces the amount you need to have in your nest egg. Suppose you are a $60,000 household with a 65-year-old worker and a 62-year-old non-working spouse. The RETIRE project calculates that you'll need 79 percent of pre-retirement income. It also calculates Social Security benefits will replace 43 percent.

That leaves 36 percent of pre-retirement income to be replaced from personal savings, or   $21,537 a year. With a 4 percent withdrawal rate, that means a $60,000 income couple would need a nest egg of $538,425--- or its equivalent in pension income or part time retirement work.

And guess what?

Most $60,000 a year families don't have $500,000 squirreled away. That's why the vast majority of people in this country need to start thinking about "Living Lite," about personal actions they can take to spend less money and still enjoy their lives.

The table below shows the nest egg requirements for family incomes from $30,000 to $90,000. The nest egg requirement was calculated by multiplying the income needed from savings by 25, reflecting a 4 percent annual withdrawal rate.

Estimating Your Retirement Nest Egg Requirement
These figures are for a couple with a 65 year old earner and 62-year-old non-earning spouse. Both the replacement rate and Social Security benefits will be somewhat different for two earner couples or singles.
Salary Level Replacement % Social Security % Percent from Savings $ Income from Savings Required Nest Egg
$30,000 84% 56% 28% $8,535 $ 213,375
$40,000 81 51 30 11,930      298,250
$50,000 79 48 31 15,425      385,625
$60,000 79 43 36 21,537      538,425
$70,000 80 39 41 28,678      716,950
$80,000 81 35 46 36,804      920,100
$90,000 82 33 49 44,412 1,110,300
Source: 2004 GSU/Aon RETIRE Project Report, Scott Burns calculations

On the web: Earlier columns about the Georgia State Retirement Income Study

April 30, 2002: Riley's Life Is Cheaper for Retirees

February 18, 2003: Don't Get Caught in the Early Retirement Tax Trap

February 22, 2004: Singled Out of Benefits