What Is A Good Retirement Income?

I’ve been an avid reader of your articles and have particularly appreciated your insightful and practical advice on financial planning. Your recent article on “How Much Money Do You Need to Retire?” has prompted me to think more seriously about my own retirement planning, but I’m left with one lingering question: What constitutes a “good” retirement income?

I’m currently 45 years old and working as a software engineer in a prominent tech company. I’ve been fortunate enough to earn a decent salary (around $120,000 per year), and I’ve been diligently contributing to my 401(k) over the years. I also have some additional savings invested in stocks and bonds.

I understand the general rule of thumb you mentioned in your article about aiming for 70-80% of my pre-retirement income. However, I’m unsure how my individual circumstances might influence this target. I am a single man with no children, and I plan to pay off my mortgage before retiring. I lead a relatively modest lifestyle but I love traveling and have always dreamed of exploring different parts of the world during my retirement years.

Considering these factors, how should I define a “good” retirement income for myself? Are there any other considerations or tools that can help me estimate a more accurate target income for my retirement?

Joshua B.

Thank you for your kind words about my articles, and I’m glad to hear that they have prompted you to think more about your retirement planning. Your question about what constitutes a “good” retirement income is one that many people wrestle with, and I appreciate your willingness to share some details about your circumstances to help frame the discussion.

Given your current lifestyle and plans for the future, a few specific factors might influence your retirement income needs:

1. Travel: Since you mentioned a love for travel and plan on exploring different parts of the world during retirement, you should account for this in your retirement budget. Travel can be a significant expense, depending on your preferred style of travel and frequency.
2. Housing: It’s excellent news that you plan to pay off your mortgage before retirement. This could significantly reduce your living costs in retirement. However, remember to factor in ongoing costs such as property taxes, insurance, and maintenance.
3. Healthcare: While you’re still relatively young, it’s essential to account for healthcare costs in your retirement planning. These can rise significantly as you get older, even for those who enter retirement in good health.

Considering these factors, your retirement income might need to be higher than the 70-80% rule of thumb due to your travel plans. It might be beneficial to create a detailed retirement budget, estimating expenses for different categories (like travel, housing, food, healthcare, etc.), to get a more precise picture of your retirement income needs.

As for tools, many online retirement calculators can help estimate your retirement income needs. These tools can factor in your current age, income, savings, and expected retirement age to give you an estimate. But remember, these are just estimates and should be treated as starting points rather than exact figures.

Since everyone’s circumstances are unique, I highly recommend working with a financial advisor. They can provide personalized advice and help you navigate the complexities of retirement planning. Given your substantial savings in 401(k) and other investments, a financial advisor can also guide you on the best strategies to optimize your savings and generate a steady income in retirement.

I hope this provides a starting point for you. Retirement planning can be complex, but taking the time to think through these issues now will pay dividends in the future.

General Advice About How Much Income You Need When You Retire

The definition of a “good” retirement income greatly depends on personal factors such as your lifestyle expectations, location, health, and longevity. However, a common rule of thumb is to aim for a retirement income that is about 70-80% of your pre-retirement income. This is based on the assumption that your expenses will decrease in retirement – for instance, you might pay off your mortgage, have lower transportation costs if you are no longer commuting, and no longer be saving a portion of your income for retirement.

Let’s say, for instance, you’re currently earning $100,000 annually. Following this rule of thumb, you’d target a retirement income of around $70,000 to $80,000 per year.

However, this is a very general guideline and might not be appropriate for everyone. Some people may find that their expenses decrease significantly in retirement, allowing them to live comfortably on less than 70% of their pre-retirement income. Others might find that their expenses increase – for instance, they may travel more, have increased healthcare costs, or have other expenses related to hobbies or family commitments.

You should also consider any debts or obligations you may have going into retirement. If you’re entering retirement with substantial debt, you’ll need to factor debt payments into your retirement income planning.

You should also consider the impact of inflation on your retirement income. The cost of living will likely increase over time, so it’s important to ensure your retirement income keeps pace with inflation.

Determining a “good” retirement income requires a thorough understanding of your personal financial situation and future goals. Working with a financial advisor or using online retirement calculators can help you better plan and prepare for your retirement needs.