A general rule is that a retiree will need at least 75 percent of the gross income he or she was making in the years just before retirement. There are several reasons why less than 100 percent is needed:
>> Income taxes are lower after retirement.
>> Saving for retirement is no longer necessary.
>> Social Security taxes disappear.
>> Clothing and commuting costs will drop.
>> Often, the worker’s mortgage is paid off.
But health care costs will climb. People over age 65 spend roughly 30 percent of their income on health care, according to the AARP Public Policy Institute.
A study last year by Aon Consulting and Georgia State University provides one of the most complete looks at the situation.
In one scenario, a worker age 65 who retires with a gross income of $60,000 would need $47,000, or 78 percent, to maintain the same standard of living. The reduction reflects expected changes in taxes and work-related expenses. The $47,000 could come from a mix of savings, Social Security and employer benefits.
People earning $150,000 or more should plan to replace 84 percent or more of their income. They face relatively heavier taxes, in part because the bulk of their Social Security benefits are taxable. Savings also need to be more substantial because Social Security makes up a smaller percentage of their necessary retirement income.
Those examples don’t include spending on Medicare or supplemental insurance, which would increase costs by thousands of dollars.
The bottom line is that men will need to have 4 to 6.8 times their annual salary in the bank, separate from Social Security. Women should aim to have 4.5 to 7.5 because they tend to live longer, according to the study.
To protect against outliving your savings, a common rule is to withdraw about 4 percent of the account in the first year and increase that amount each year by 3 percent for inflation.
Your income will be supplemented by Social Security, too. This year, the average Social Security benefit is $1,153 a month.
The Associated Press
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