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ONE RULE OF THUMB suggests that, to retire in comfort, you need 80% of your preretirement income. Why the 20% drop? You are no longer saving 10% or so every year toward retirement and you’re no longer making an employee’s 7.65% payroll-tax contribution to Social Security and Medicare. In addition, you won’t have to buy work clothes or pay commuting costs. Your income tax bill should also go down, in part because a portion of your retirement income will likely come from Social Security benefits, which are always at least partly tax-free.
It turns out, however, that many retirees are living on far less than 80% of their final salary. For instance, a 2014 T. Rowe Price Group survey of relatively affluent recent retirees found that these retirees were, on average, living on 66% of their preretirement income—and they reported being quite content.
This isn’t a huge surprise, for three reasons. First, many folks save much more than 10% in the run-up to retirement, so they’re already used to living on a lot less than 80% of their income. Second, many homeowners aim to get their mortgage paid off by retirement, which eliminates a major expense. Finally, by retirement, the kids are usually through college and in the workforce, which also greatly reduces the parents’ spending. Add it all up, and you may find you can comfortably retire on 50% or 60% of your final salary.
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This is somewhat backwards way of addressing the issue and ends up being a guess rather than based on any data. I would not recommend this approach.
A much better approach is to track your expenses for a few years before you retire. A simple excel or google spreadsheet will suffice. Whenever you go over your credit card statements is a good time to assign the amounts spent to categories. If you use cash, keep a mental note or jot down what you spent it on.
In the spending tracker sheet, major categories can be used (e.g. food, entertainment, health, utilities, autos, house maintenance, etc.) and then refined a bit more if you are inclined (e.g., for cars: gas, maintenance, insurance, etc.)
Even after one year you will have a really good idea of how much you spend and perhaps more important, how much you NEED to spend (food, shelter, etc.,) vs. how much is discretionary (that $15 dollar artisan latte).
Data: don’t make a major decision without it.