Money needed for retirement
I am a faculty member. From my teaching and research experience, if I want to do something significant, the first thing I want to know is the goal and expectation. I usually ask my first-year doctoral students to find a dissertation in their field, so they know what it takes to graduate. Similarly, as I plan and prepare for my retirement, I want to know the amount of money needed for retirement.
It turns out that this is not an easy question to answer. To determine the amount of money needed for retirement, a more fundamental question to ask myself is: what income will I need for retirement?
From the article by Christine Benz at Morningstar, she says:
For years, the financial-services industry has drilled the “80% rule” into pre-retirees’ heads, suggesting that they’ll need to replace 80% of their pre-retirement income when they retire.
Though later in the article, Christine goes in depth and finds different percentage of retirement income replacement:
Aon Consulting’s Replacement Rate Study, which concludes that in 2008, a 78% income replacement rate would allow a 65-year-old with $60,000 pre-retirement income to retire in 2008 with the same standard of living he had while working….The Aon study showed that a retiree earning $90,000 prior to retirement would need to replace 78% of his or her pre-retirement income during retirement to maintain a steady standard of living, while one who retired with a $20,000 salary would need to replace 94%. A retiree with a working salary between those two poles–$50,000–would need an 80% replacement rate to maintain his or her standard of living.
Smart401K provides a survey for estimation of retirement income replacement, ranging from 60% to 100%. My current salary is between $50,000 and $90,000, so I think from both sources of data, 80% is a good target for income replacement.