While retirees are often counseled to estimate that they'll spend 75% to 80% of their working incomes in retirement, a paper by David Blanchett, formerly of Morningstar and now at PGIM, found that higher-income, higher-saving households may need just 60%, or even less, of their preretirement income during retirement, while lower-earning, lower-saving households may need closer to 90%. It may be difficult to forecast your actual income-replacement needs, so here are the key steps to take as you do so: Step 1: Find a realistic baseline for your income If you're close to retirement and seek to maintain a standard of living in retirement similar to what you had while you were working, using your current salary as a baseline is reasonable. But if you're younger — say, in your 40s — it may be wise to nudge up your baseline income for retirement-planning purposes, because your current income may not be reflective of what you'll want to spend when you eventually retire.
Not only are you apt to receive cost-of-living adjustments as the years go by, but career gains could also lead to a higher salary over time, which you may want to "replace" in retirement. As Blanchett noted in his paper, the average college-educated individual will make a 50% higher salary at retirement than he or she did at age 25. Gains in salary over time are less pronounced for people with lower levels of educational attainment.
Step 2: Subtract your savings rate Take a look at what percentage of your salary .
