Retirement · February 03, 2022

Estimating Your Retirement Income Needs

Planning for retirement is no easy task. There are many things to consider, like how you'll spend your time, how you'll fund those activities, as well as sustain your daily necessities like home expenses and groceries. How much you need in your retirement fund will depend on several factors, such as what kind of lifestyle you want to lead, medical expenses you may need to cover and who else, apart from yourself, you may need or want to support in retirement.

In this article, we'll discuss methods you can use to estimate how much you'll need in retirement and some influencing factors you should consider in your estimations.

Methods of estimation

There are two primary methods to estimate your retirement income needs. A smart plan utilizes both to give you the best possible picture of how much you'll need in retirement.

1Estimate using your current income

A common and simple way to start retirement planning is to calculate a percentage of your current income. Depending on what you're hoping to do in retirement, the percentage can be anywhere from 60% to 90% of your current income. There are even cases where you may need more than 100% of your current income if you're planning on increasing spending during retirement, such as traveling to far-flung destinations.

A financial planner can help you better translate your desired retirement lifestyle to how much of your income you'll need.

2Estimate using your future expenses

The second way to estimate how much you'll need in retirement is to estimate your future expenses.

Estimating expenses can be a challenge, especially as you try to list all the things you may need to pay for in the future. Here's a list to get you started.

  • Housing and all its associated costs, such as rent or mortgage, insurance, repairs and upkeep, and taxes
  • Utilities
  • Food, such as groceries and dining out
  • Clothing
  • Transportation, including gas, insurance, maintenance, taxes and registration
  • Insurance, such as medical, dental, long-term care, life and disability
  • Non-covered healthcare costs like deductibles, co-pays and prescriptions
  • Investment advisor fees
  • Income taxes
  • Debt from loans and credit cards
  • Education for children or grandchildren
  • Gifts, both personal and charitable
  • Recreation and travel, such as hobbies, gym memberships, and leisure activities
  • In-home or facility-based care for you, your spouse, or your parents

Remember, not all costs will stay the same year to year. For example, you might pay off your mortgage in retirement, thereby freeing up some more money.

This method can be used on its own but is more powerful when used in conjunction with taking a percentage of your current income to estimate retirement funds. Working with a financial planner can help you get your retirement fund needs and cash flow estimates as close to your goals as possible.

Factors that will influence your estimates

Now that you've determined a basic estimation of how much you'll need in retirement, what other influencing factors should you consider? Don't overlook these three factors.

  1. Inflation and the cost of living: Average annual inflation will cause a slight increase in goods and services each year—typically by 2%. High inflation years such as 2021 are difficult to predict. It's wise to increase your retirement fund estimates to give yourself some padding in case of a high inflation event during your retirement.
  2. How early you want to retire: Keep in mind that with early retirement, you'll lose not only the salary you would have earned during those years, but the compound appreciation on your untouched investments. Lastly, you'll have to cover the cost of healthcare during the gap before you qualify for Medicare. Without an employer subsidy, the healthcare cost can be significant. There are many people who partially retire by scaling back or have plans for some form of passive income to supplement their retirement income. Whether you fully or partially retire, be sure to account for how long you'll need those funds to last.
  3. Life expectancy: While we all hope we’ll live as long as we possibly can, we must acknowledge that the longer we live, the more funds we'll need. With the increasing costs of healthcare—and the sobering fact that 70% of adults 65 and older will need long-term care in their lifetime—we must be sure to have enough saved to cover our care needs.

Know your retirement income sources

There are three main types of retirement funds individuals may set up or tap into over the course of their lives from which they pull during retirement: employer-sponsored plans, individual retirement accounts and government-sponsored programs.

Employer-sponsored plans

Employer-sponsored plans can be qualified or non-qualified. This designation is important to know because it impacts when you can start taking distributions.

Qualified retirement plans, or QRPs, are funds like 401(k)s, profit-sharing plans, employee stock option plans—or ESOPs—and defined benefit pension plans. With QRPs, you must start taking distributions—either in lump sum or periodic payments—by April 1 of the year following your retirement or turning 72. These distributions will be taxed as ordinary income under IRC 72, the tax code rule that allows penalty-free withdrawals from tax-advantaged retirement accounts like IRAs, 401(k)s and 403(b) plans.

Non-qualified retirement plans, or NQRPs, are great tools for higher-income individuals who find that the contribution limits on QRPs are too low for their needs. These types of plans are typically customized per person in terms of distribution timelines and amounts, but some plan structures include deferred compensation plans and supplemental executive retirement plans. NQRPs don't receive the same special income tax treatment as QRPs.

Individual retirement accounts

Individual retirement accounts, or IRAs, are a commonly used vehicle for retirement funds. IRAs often act as the receiving receptacle for 401(k) rollovers when changing jobs, although that's not the only way or reason to open one.

When choosing between the two types of personal IRAs—Roth and traditional—consider which makes sense for your income and tax situation. Funds in traditional IRAs are contributed pre-tax, while funds in Roth IRAs are contributed post-tax. When eligibility requirements are met, funds distributed from traditional IRAs are subject to ordinary income taxes, while distributions from Roth IRAs are income tax-free when the customer is over 59 1/2 and the account has been open for 5 years. Roth IRAs have an income limit based on modified adjusted gross income, while no income limit exists to be able to contribute to a traditional IRA—although your income determines the deductibility of the contribution.

Government-sponsored programs

Whether you're employed by a company or for yourself, you'll have paid into the Social Security program through taxes. Social Security is determined by an individual's work credits rather than by need. With Social Security, you can start taking distributions as early as age 62, but taking those distributions before full retirement age—typically age 67—will result in a permanently reduced benefit payout.

What to do if your income falls short

While thinking about not having enough for retirement can feel scary, it's an exercise we should all go through to better plan for how we might make up a shortage of our retirement fund goals. A financial professional can best help you determine how to make up those funds, whether that's through reallocating your investments, purchasing an annuity or life insurance policy that will pay you a stream of income, reducing spending, working part-time during retirement, or delaying your retirement date.


Planning for retirement is no simple task. You need to consider what type of retirement lifestyle you want to lead and make your best estimate at how you'll pay for that lifestyle. There are also many extraneous factors to consider, such as healthcare costs and inflation.

The good news is there are many options for building your retirement nest egg that may even be painless if you start today.

If you're looking for help estimating how much you'll need for retirement, have questions about your funding or just want to get started in creating a retirement plan, reach out to your First Citizens Partner.


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