If you've ever used a retirement calculator, you've probably encountered some version of this question: “What percentage of your current income will you need in retirement?”

Maybe you've heard 70%. Maybe 80%. Maybe someone told you that you'll only need half of what you're making today. But here's the problem: Your retirement doesn't know what percentage of your current income you make. It knows what your life costs. And those two numbers can be very different.

As retirement gets closer, one of the biggest questions you'll need to answer isn't simply, “Do I have enough saved?” It's: “How much income will I actually need to live the retirement I want?”

Your Paycheck Is Not Your Retirement Expense

Consider someone earning $250,000 a year. They may assume they'll need 80% of that income in retirement, or $200,000 a year. But why $200,000? What does that money actually pay for today?

Your current income is probably doing a lot of jobs besides funding your lifestyle. Some of it may be going toward retirement savings. Some may be going toward payroll taxes. You may have work-related expenses, business expenses, or other costs that won't exist once you stop working. If those expenses disappear, you may not need to replace every dollar of your current paycheck.

But the opposite can also be true. Retirement may introduce expenses you don't have today. You might want to travel more. Spend more time at the lake. Take up a new hobby. Remodel your home. Buy a new vehicle. Help your children or grandchildren. Or finally take that trip you've been putting off for 30 years. And then there's healthcare, which can become a significant part of the equation as you get older.

So rather than asking: “What percentage of my income will I need?”

A better question is: “What will I actually want to spend?”

Build Your Retirement Income Number From the Bottom Up

One of the best ways to estimate your retirement income needs is to build the number from the bottom up. Start with your baseline expenses. What will it cost to maintain your household?

Think about:

• Housing or mortgage payments
• Utilities
• Insurance
• Food
• Transportation
• Healthcare
• Property taxes and other taxes
• Other recurring household expenses

These are the expenses you're likely to have regardless of how you spend your free time.

Then, think about the retirement you actually want. How often do you want to travel? Do you want to spend more time at the lake? Are there hobbies you've always wanted to pursue? Do you want to help your children or grandchildren financially? Is there a home project you've been putting off? Do you want to replace your vehicle every few years? Do you want to take one big trip every year—or several? These aren't necessarily “extras.” They're part of the retirement you're planning for.

Finally, consider the things you can't predict yet. A roof may need to be replaced. Your vehicle may need an unexpected repair. You may have a major medical expense. You may decide to make a large purchase you hadn't planned on. A good retirement income plan needs room for those things.

Because retirement isn't a perfectly predictable 30-year spreadsheet. It's life.

Don't Just Look at How Much You Have

Another common mistake is focusing too heavily on the size of your retirement accounts. Imagine two people who each have $2 million saved. It sounds like they're in roughly the same financial position, but they may not be.

The amount of money you've accumulated is only one part of the equation. You also need to understand:

• How much you're spending
• Where your income will come from
• When you'll need that income
• How much risk you're taking to generate it
• How taxes will affect what you actually get to spend

For one retiree, income might come from Social Security, a pension, a traditional IRA, a Roth IRA and a taxable investment account. For another, the mix might look completely different. And if you're a business owner, your eventual business transition or sale could be another significant piece of the puzzle.

These income sources don't all work the same way. They have different tax implications, different levels of certainty, different timelines and different risks. That's why retirement income planning is more complicated than simply taking your account balance and dividing it by 25 or 30 years. 

Your Retirement Income Number May Change Over Time

There's another important consideration: You probably won't spend the same amount every year of retirement.

Think about retirement in stages.

Early Retirement: Do More

The first few years may be some of your most active. You're healthy. You're energized. And, for the first time in decades, you have the time to do the things you've been putting off. You may travel more, pursue hobbies, spend more time with family. You may finally tackle those projects around the house.

So, your spending could actually be higher during these years than it will be later.

Middle Retirement: Settle In

Over time, your lifestyle may become more predictable. Travel may slow down. You may spend more time at home. Your hobbies and routines may become more established. Your annual spending could settle into a more consistent pattern.

Later Retirement: Plan for Increased Needs

Later in life, healthcare, assistance or long-term care could cause expenses to rise again. That doesn't mean those costs are guaranteed. It means they should be considered. Instead of planning around one fixed retirement income number, it can be helpful to think about how your income needs might change throughout retirement.

The Real Question Isn't “Can I Retire?”

There's an important difference between being able to stop working and being able to afford the retirement you actually want. You might technically have enough money to leave work, but if you're constantly worried about whether you can afford the next trip, the next vehicle or an unexpected expense, that may not feel like the retirement you spent all those years envisioning.

On the other hand, you might discover that the retirement you want costs less than you thought.

• Maybe your mortgage will be paid off.
• Maybe your children are financially independent.
• Maybe you're no longer spending money on commuting, professional clothing, business lunches or other work-related expenses.
• Maybe the eventual sale of your business provides another source of capital.

The key is to find a realistic number that supports the life you actually want.

Start With Your Life, Not a Percentage

If you're getting closer to retirement, don't begin with the question: “What percentage of my current income will I need?”

Ask:

• What will it cost to maintain my lifestyle?
• What do I want to do in retirement?
• Which expenses will disappear when I stop working?
• Which expenses could increase?
• Where will my retirement income come from?
• When will I need each source of income?
• How will taxes affect what I actually get to spend?
• How much flexibility do I need for the unexpected?

These questions can give you a much clearer picture than an arbitrary 70% or 80% rule.

Because retirement planning isn't simply about asking whether you have enough money.

It's about understanding what your money needs to accomplish.

And when you know what your retirement income actually needs to do, you can make better decisions about how to save, invest, withdraw and manage your wealth today.

This content was generated utilizing the help of AI research and is intended for informational purposes only. Please consult a qualified professional for personalized advice. For specific tax planning advice or services, please consult a qualified tax advisor or CPA.