The Right Retirement Question … and the Answer

Since I began in this business almost 30 years ago, I have repeatedly heard that you should plan on needing about 70% of your pre-retirement income during retirement. While this might be a good starting point for somebody age 40 and under who's just setting up a preliminary plan, for an actual retiree this figure is meaningless. To paraphrase a political slogan, it’s YOUR EXPENSES DUMMY!!!

Your economic needs during retirement are not related to your pre-retirement income; they're specifically related to your post-retirement expenses. Making a broad generalization close to retirement is economic suicide. If prior to retirement you have a lot of disposable income—you are saving a lot, have just finished paying off your mortgage, or finished paying for the final year of your child’s medical school—then you probably have a pre-retirement income that is far greater than you post-retirement needs. However, if that is not the case, then the only way you are going to have a handle on what you need during retirement is to set up a realistic expense budget for what you are living on right now.

The most common mistake that pre and recent retirees make is to seriously understate their living costs, believing that they can get by on much less than is actually possible. Although it takes some work to set up the budget, it’s one activity that will help you create realistic retirement goals. Remember that your retirement budget will be unique to you and not some made-up number that you read about in a newspaper or magazine.

Only a few elements remain under your control and spending is one of them. If you choose to control spending—and ONLY if you chose to do so—can you truly influence the quality of your retirement. So don’t ask “How much will I need to retire?” Instead, ask “How much am I spending right now?” and “What will my expenses be when I stop practicing medicine?”