Mapping Your Path to Retirement: Understanding Income Replacement Needs

Key Takeaways

• Planning your retirement savings is like planning a party—you want it to cover about 45% of your pretax, preretirement income, with Social Security acting as your party crasher.

• How much of your preretirement expenses you need to cover in retirement can vary, just like how much cake you need at a party. It depends on your retirement age, expected lifestyle, and current income level.

• High earners, brace yourselves! You'll need to replace more of your pretax, preretirement income through personal savings. It's like needing more cake because you invited more guests!

Ever felt like a lost tourist in a new city? That's retirement planning for you—without a goal, you're just wandering around hoping to stumble upon the right path.

To make it less of a wild goose chase, Black Investors Coalition crunched the numbers and found that most folks need to replace between 55% and 80% of their pretax, preretirement income to keep living the good life after they stop working.

Why the drop? Well, you probably won't be throwing money into retirement savings plans. Plus, not working means possibly lower taxes, less life insurance, and fewer daily expenses. No more work clothes or commuting costs! You might even decide to kiss your mortgage goodbye.

So, where's the cash coming from? Good news! Not all of it needs to come from your piggy bank. Social Security will chip in—more for those who earned less, like a generous relative who loves you more when you earn less.

Black Investors Coalition says if you're making between $50,000 and $300,000 a year, aim for your savings (including pensions) to replace about 45% of your pretax, preretirement income. Of course, your mileage may vary depending on income, retirement age, and other fun factors.

How much you earn matters

Your paycheck is like the DJ at your retirement party. It determines what percentage of your income you need to replace. High earners spend less of their income while working, so their retirement replacement goal is lower in percentage terms but still keeps the party going.

Someone earning $50,000 might need to replace around 80% of their pretax, preretirement income in retirement to keep the tunes playing, while someone earning $200,000 might aim for closer to 60%.

Social Security covers less for higher earners

For many, Social Security is like the party punch—it's there, but the amount you get depends on your income. Lower-income folks get a bigger sip. Someone earning $50,000 a year might expect Social Security to replace about 35% of income, or $17,500. But if you're raking in $200,000, expect only 16% from Social Security, or $32,000. Earning $300,000? Just 11%, or $33,000, will come from Social Security.

When you retire matters

Retirement age is like the start time of your party. The earlier you start, the more you'll need to dip into your savings because Social Security checks will be smaller. Take Bill, for example. If he retires at 67, he needs to replace 45% of his income with savings. Retiring at 62 bumps it up to 55%. But working until 70 means he only needs to replace 40%! Delaying the party gives you more time to save and bigger Social Security benefits.

Planning for retirement income

Once you know your party destination, planning and tracking progress gets easier. For retirement, aim to keep living your current lifestyle—and plan for savings to provide 45% of your preretirement income.

Remember, the amount of preretirement income you need to replace from savings depends on factors like retirement age and lifestyle. As always, it's wise to consult a financial advisor to make sure your party plans are on track.