Retirement Basics

Everyone has a different notion of what constitutes an ideal retirement. While some travel, others volunteer or start their own businesses, while still others just want to relax. People also enter retirement at a wide range of ages and for a variety of reasons. Though some people want to retire early, others want to work for as long as possible.

Whatever your plans for retirement, you need to consider:

  1. The number of years you'll be living in retirement
  2. The lifestyle you want
  3. If you'll be single or living with a partner
  4. If you'll owe money on your mortgage or for children's educations
  5. If you'll have adequate health care coverage

The bottom line is that you generally need 70% to 100% of your pre-retirement income to live comfortably in retirement. For example, if you earn $65,000 the year before you retire, you'll need $52,000 to replace 80% of your income ($65,000 x .80) the year you retire.

And, you'll need a little more each year to keep up with the rate of inflation. Inflation has raised the cost of living approximately 3% every year since 1926. Using the example above, this means that in your second year of retirement, you'll need about $1,560 ($52,000 x .03) more than you did the first year just to stay even.

Changing Rates of Inflation

Inflation isn't a fixed rate. Though it has averaged 3% per year since 1926, it reached a high point of 13.6% in 1980 and averaged 7.9% between 1973 and 1982.