How much income you need to sustain your lifestyle during those golden years?

Common wisdom says the magic number is 85 percent. The thinking goes like this: if you make $100,000 pre-retirement, then you’ll need an inflation-adjusted $85,000 to maintain your standard of living after retirement.

I can't believe I forgot to have children
Photo: ClintJCL

But that’s not necessarily so. Many of the expenses associated with the working years – wardrobe, transportation and the like – drop off during retirement. Employment tax and 401k contributions are no longer withheld from your paycheck. In a typical household, the kids are raised and educated by the time you collect your gold watch.

And, oh yes, what about those children? They tend to be expensive and the majority of households can’t say, as the pop art image does, “I can’t believe it. I forgot to have children!

You can even get a personalized (by names of children) estimate of raising your children on the Department of Agriculture website.

Hint: it’s not a small project.

A consumption smoothing model takes into account all of these factors. Plug in hypothetical, but common, numbers and it returns a needed replacement income as low as 50 percent of working income for some workers. This number will vary according to where you started - if you were living on the razor’s edge, you will need a higher percentage to make ends meet.

Needing less income in retirement also means you don’t have to save as much today.

Most financial advisors pad the needed number by assuming every dime you’ve ever earned was spent on yourself (or your spouse) and that income needs to continue. That’s where the 85 percent comes from. It’s a simple formula – the more retirement products you buy, the rosier their retirement looks.