Expenses and Income NeedsYou'll need to structure your retirement "paycheck" to cover two types of expenses: basic needs and discretionary needs.
Basic needsPlan your retirement income to make sure you can pay for necessities – ongoing, non-discretionary expenses like food, shelter, transportation, health care, and other essentials. These expenses will likely increase with inflation, and since they're essential, it will be challenging to reduce them. You may want to consider providing for your basic needs with guaranteed sources of income – such as Social Security, pensions, and annuities.
Discretionary needsThe retirement lifestyle you dream of might include more activities that are important but discretionary – not essential. Chances are your guaranteed income sources will not be sufficient to pay for all your discretionary expenses as well as your basic needs throughout retirement. Your discretionary expenses could require additional income that will likely be higher during the early years of retirement when you are more active.
Retirement expenses vary with ageYounger retirees generally spend more on discretionary items such as travel and entertainment. In fact, early retirees tend to spend the same level of money they were living on right before they retired, if not more. As retirees age, nondiscretionary expenses take a larger portion of income. And, health care costs are likely to increase significantly over time.
How much income will you need?An often-cited estimate is that you will need about 80% of your current annual income for a comfortable retirement. However, depending on your personal lifestyle, you may need more or less. Some retirees might be able to get by on 70% of their pre-retirement income, while others might spend well over 100%.
To help you determine how much income you will need, consider how your plans for retirement will impact your spending. Take for instance the following example expenses:
While the level of spending in each can have different impacts, if you marked most of these as "more," you should plan for retirement income greater than your pre-retirement income. Conversely, if you marked many as "less," then you might be able to live on 80-90%.
Planning your retirement income requires balancing the risk of drawing down your income too quickly and being left with little to live on in your 80s or 90s, and the opposite scenario of spending your income too slowly and needlessly crimping your retirement standard of living.
We're here to helpDetermining your expenses and income needs can be complicated. To talk to a Wells Fargo Funds Investment Specialist, call