You've heard it all before: Don't go swimming for at least an hour after eating. Cross that bridge when you come to it. You'll be able to live on 70% to 80% of your current income in retirement.
Unfortunately, I'm qualified to address only that last one (though if you can cross a bridge before you've come to it, we'd like to see pictures).
The "70% to 80%" rule of thumb is based on the assumption that many of your current expenses will go away in the golden years. For the most part, this is true. Once you kiss the boss goodbye, you'll no longer endure the following:
- Work-related expenses, such as commuting costs, professional wardrobe upkeep, and cubicle decor.
- Social Security taxes (15.3% of income for the self-employed, 7.65% for the other-employed).
- Contributions to retirement plans (it's time to stop the giving and start the taking).
- Mortgage payments, if your house will be paid off by the time you retire.
There are two other ways your expenses might decline. First, retirees tend to downsize. With no need to keep the four-bedroom house now that the kids are grown, for example, some pensioners flee the big house for the Sag-A-Lot colony for mature nudists.
Overall taxes might also decrease. Only a portion of Social Security benefits are taxable -- if at all -- and any income derived from long-term capital gains will be taxed more gently than ordinary income.
Some studies support the 70% to 80% rule. The "2001 RETIRE Project" report, conducted by Georgia State University, found that retirees need 74% to 83% of their income to maintain the same lifestyle in retirement. And in another article ("How Much Will You Need to Retire?"), I looked at actual spending figures from the U.S. Census Bureau and found that most older Americans have lower expenses -- along with lower incomes.
However, I've found that many retirees require the same level of income in retirement they enjoyed while working. How? It comes down to this: If you're not making money, you're spending money. You have to fill the free time somehow. New hobbies, trips to Europe, and gas-guzzling RVs cost money. Many retirees have told me that they'd planned on spending less in retirement, only to find themselves shelling out even more.
What will retirement cost you? That's a tough question if you're more than a decade from retiring. But if you're closer to hanging up the work boots, create a retirement budget. To get an idea of how much you'll pay in taxes, complete a sample return -- if you use an online service or software to prepare your taxes, this won't seem so daunting. Once you know how much retirement will cost, make sure you're saving enough to pay for your hobbies and trips. After all, nudist colonies aren't cheap.
Robert Brokamp is the editor of The Motley Fool's Rule Your Retirement newsletter service. The Motley Fool is investors writing for investors.
