A big part of retirement planning is knowing how much replacement income you’ll need when your working days are over. If you don’t have a firm grasp on your monthly expenses, it’s tough to know how much money to save.

One common recommendation is that you save enough to bring in 60% to 80% of your current monthly income in retirement.

But is this good advice for everyone? For many, it can be better to think less about income replacement and more about what you’ll be spending in retirement.

Income replacement or spending replacement?

The amount of income you need in retirement is directly related to your expenses and spending patterns. Both of these are expected to go down once you retire. If that’s the case, you’ll need less income to maintain your general lifestyle.

Given this, thinking about your retirement income needs as a paycheck replacement may not be the best approach. You may want to view it as more of a spending calculation instead. Here are a few expenses that may get cut, which could make your disposable retirement income go further:

  • Taxable income typically goes down in retirement. Social Security taxes go away completely (assuming you are no longer earning income) and Social Security benefits are partially or fully tax-free.
  • You’ll likely be withdrawing money from your savings to generate retirement income and no longer be contributing big amounts.
  • Smaller families can mean smaller, less expensive homes. Your mortgage payments may be reduced or your mortgage paid off.
  • If you have kids, you can redirect the money you used to spend on their education to your own needs.

But some expenses may go up in retirement, such as:

  • Health care. Ten years into retirement, the primary concern of retirees is health care and its associated costs.1 Healthcare costs are projected to rise 5.1% annually, while Social Security cost-of-living adjustments are pegged to inflation.2 As of May 2017, the inflation rate was 1.9%.3
  • Utilities and housing maintenance. Hanging out at home could mean higher costs for heating, electricity and water, among other things.
  • Hobbies. If you want to pursue hobbies like travel or going to shows, you’ll need to budget for these “nice-to-haves.”

It can be helpful to think first about your expected expenses in retirement instead of trying to figure out what percentage of your current income you’ll need each month. Keep in mind that that your month-to-month bills will likely change once you retire. This approach can help give you a better idea of how much money you’ll need to put away to enjoy the retirement you’re working hard for.

1 (2016, October 6). Running Out of Money Is Top Retirement Concern, Says AICPA Survey of Financial Planners. American Institute of Certified Public Accountants. Retrieved June 7, 2017, from https://www.aicpa.org/Press/PressReleases/2016/Pages/Running-Out-of-Money-Top-Retirement-Concern-Financial-Planners.aspx
2 (2016). HealthView Services: 2016 Retirement Health Care Costs Data Report ©. HVS Financial. Retrieved June 13, 2018, from https://www.prnewswire.com/news-releases/healthview-services-2016-retirement-health-care-costs-data-report-released-300270880.html
3 Current U.S. Inflation Rates: 2006-2017. U.S. Inflation Calculator. Retrieved June 19, 2017, from http://www.usinflationcalculator.com/inflation/current-inflation-rates/