How much do I really need for retirement?

Mention retirement and you’ll find many people start to nod knowledgeably and talk about the 80% rule. For those unfamiliar, the thinking is that a person will need approximately 80% of his/her current income while working in order to manage comfortably in retirement.

But although general rules can be helpful by providing a point of reference for organized planning, rules are only generalities which can be very misleading as well. The 80% rule is meant to give people a general idea of how much income they need to save during their working years to be able to generate sufficient income in retirement. Among the questions begging to be asked here is – 80% of what income? Is it the salary you were earning in your 40s, 50s or 60s? Is it your pre-full retirement salary or does it take into account that you’re planning on working part-time well into retirement?

Rather than focusing on a possibly confusing percentage of earned income it’s far more helpful to consider your personal situation and do your calculations based on those much more exact facts. In retirement there are going to be elements in your life that will be less expensive, and other areas that will cost more than during your working years. What’s critical is to plan your retirement based on your best estimates of future expenses so that you can judge whether you are saving enough to support your plans or whether you need to make some serious changes.

Let’s take a look at some of the areas to consider when completing your plan.

  • Chances are that you won’t have mortgage repayments to complete in retirement. And seeing as the typical mortgage repayment can be 15-25% of your monthly income, that’s a fair sum of money you can expect to save in your monthly budget.
  • Kids’ expenses can be dramatically less in retirement, if and when your children become financially independent. But ensure that you think through your expectations. Are you planning on providing support for your married children while they learn a trade, study in yeshiva or raise a family? While raising your children can be expensive, helping to raise your grandchildren (if you can afford it) will also not be so cheap.
  • What lifestyle will you lead when retired? If you are content living quite simply, you should be able to live on much less. If you’d like to travel the world you need to ensure you have the plan in place to support your desired new way of life.
  • Medical coverage is a wild card, and incredibly difficult to build into a standard budget. Obviously no-one knows how what medical cover they will need. In Israel medical care is subsidized so in theory that should limit the potential expense. However, there is a private medical care system that some people prefer to use, as it offers speed and a choice not necessarily available to those in the public medical care system. Do you want to have money available to access that service?
  • Similarly, there are a wide variety of long-term care options. And obviously the different options come with different price tags. While no one really wants to think about needing long term care, sometimes confronting those difficult topics can be critical in helping you make better long term financial decisions.

So put the percentage aside. It is much more critical to do a personal retirement plan of what your future revenue will be and see if your planned expenses are realistic.

Your retirement budget will include a projection of future sources of income. What pensions do you have owing to you – Israel’s bituach leumi, social security from the US, private savings? Include all your projected future retirement income by estimating future revenue expectations (including income from property, pension funds and savings), and you have the first major part of the foundation of your retirement plan.

Then take a look again at your projected expenses. If they match your revenue – great! If not, then consider one of the following alternatives.

  • Work longer – extend your working years to save more and delay dipping into your retirement savings. Part-time work in retirement might be an excellent option for many.
  • Look for more affordable housing. You might be able to live in a less expensive dwelling and use some of your built up capital to live more comfortably in retirement.
  • Cut expenses during your working years and into retirement to ensure you don’t come up short.

So, whereas it’s crucial to know how much to save for your retirement, it’s even more important to get the balance between income and expenses right!

Invest time in your research. Be prepared that many of the variables might be difficult to quantify. If you don’t feel comfortable working it out on your own, consult a professional so that you will be assured that your retirement plan suits your needs. And then you too can nod knowledgeably as you quote the percentage of your salary that you need to fund your retirement.