Imagine two couples. They live side-by-side in virtually identical houses. The Youngs have two children in their early teens. The Olds have lived there forever and are retired.

Now guess the income the Olds would need to have the same standard of living as the Youngs, expressed as a percentage of the Youngs' income:
  • 100 percent, because it is expensive to be old;
  • 80 to 85 percent, because that's the figure used by most financial planners;
  • 65 percent, because one margarita does the work of two when you're over 65;
  • less than 50 percent, because you can sustain the same standard of living on less money when you retire.
The answer is less than 50 percent. Let me show you how and why. This low figure should be a source of hope for millions of people wondering how they will ever retire.

Let's assume only one of the Youngs works and earns $90,000 a year. Let's also assume they live in Texas, a no-income-tax state, that they own a $250,000 house with a recent $200,000 mortgage at 6 percent, and that they save 6 percent of income in their employer's 401(k) plan.

Now watch how quickly their income disappears.

About $6,885 comes off the top for the employment tax. Another $5,400 goes to the 401(k), and $7,405 goes to the federal income tax. This leaves about $70,310.

The home mortgage takes another $14,400 a year. Paying all the home operating expenses takes another $12,500. This leaves about $43,410 for spending other than shelter. This includes debt service for things like cars, credit cards, etc.

And let's not forget the children.

They cost money. If you have them, you've probably noticed. One commonly used algorithm of family expenses is that the cost of a household rises as the square root of the number of members. No, I'm not kidding. The economists, social scientists and social workers who think about this stuff have found this little rule works as well as tons of surveys and measuring.

By this rule of thumb, a single person can live at a cost of 1. A couple can live at a cost of 1.41, not 2. A couple with one child can live at a cost of 1.73, and a couple with two children can live at a cost of 2. It also means that the kids cost about 29 percent of the money left. This leaves the parents with 71 percent. So $12,589 is spent on the two kids, and the parents have about $30,281 to spend on themselves.

As I said, it's amazing how quickly our money disappears.

Fortunately, there is a silver lining. All these adjustments mean the Olds will need much less income at retirement to have the same living standard as the Youngs. The Olds, for instance, would need the same $30,281 for spending and the same $12,500 in home operating expenses as the Youngs. But they wouldn't have the $12,589 in child expenses, and they wouldn't have the $14,400 in mortgage payments because they would have paid it off. So the spending power they need to replace would be $43,321 instead of $70,310.

Big difference.

The Olds no longer have to pay employment taxes either, because they don't work. And they can skip the 401(k) contribution, as well. If they had no Social Security benefits, they would need a pre-tax income of about $45,000. This would allow them to pay federal income taxes of about $1,650 to deliver after-tax spending of $43,350. Their income tax bill alone is $5,755 less than the Youngs. In other words, the Olds would need only 45 percent of the Youngs' income to have the same living standard.

But wait, it gets easier.

Most people have Social Security. Couples like the Olds, typically, have about $30,000 in Social Security benefits. The remaining needed income, about $13,000, would cause none of their benefits to be taxed. Result? Their income tax bill disappears. So their total income requirement is about $43,321. That's 43.3 percent of what the Youngs need to maintain the same standard of living.

Needless to say, we could do a lot of dickering about this.

While the retired couple has the same standard of living as the young couple with children, most people look forward to the increase in their standard of living that moves in when the kids move out.

That's also the reason most people long to burn their mortgage payment book.

On the other hand, I've ignored the benefit of paying off all other debt, such as car loans and credit card balances. I've also figured for a relatively high income level, $90,000. The 80 percent of households with incomes below that level will find that Social Security does relatively more for them. So their need for income from other sources is smaller. Their taxes will be nonexistent.

Households without children have some, but not all, of these benefits. They need to replace more income because they never experience the lovely squeeze children provide. So, if you're young and have children, give them an extra hug. In an odd way, they make your eventual retirement easier.