Most of us will be on a fixed income once we retire. In addition to any pension or social security benefits we might receive, we will need to determine how much to pay ourselves out of our retirement savings account. Retirement industry experts recommend planning to be able to replace 80% of your pre-retirement income. That’s a great goal, but is that right for you?

Maybe, Maybe Not

For some us, 80% won’t be enough. For others, 80% could be much more than we will need. Knowing the replacement rate you truly need will not only help you budget in retirement, but it can also help you determine when you will be financially ready to retire.

Here are some things to consider when determining how much you need to maintain your standard of living in retirement.


Many of us plan to pay off our mortgage before we retire. That’s a smart move, and will certainly free up some money for other expenses. But even once your mortgage is paid in full, your housing expenses will not go away entirely. Expenses such as property taxes and homeowners’ insurance may be included as part of your mortgage payment. If these aren’t things you are currently paying for separately, don’t forget to account for them in your new budget.

Health Care

Some expenses that come out of our paycheck now will have to be paid out-of-pocket once we retire. For example, health insurance. If you’re lucky enough to have employer-provided retiree health insurance, you may not have to worry much about paying health care premiums. But what if you don’t? You will be eligible for Medicare at age 65, but it isn’t free. Health care expenses will cost the average 65-year old couple $265,000 during retirement, making this one area where you are likely to spend more.


Some of us have plans to travel more in retirement. Some plan to take up golf or other hobbies that may come with a price tag. Even spending more time with friends and family can come at an expense if you’re the one regularly playing host. If your plans include entertainment that isn’t currently part of your budget, you’ll need to allow for it.

Work-Related Expenses

Depending on where you work and what you do for a living, you may be able to save money once you’re no longer reporting to work. For example, if you currently have a long commute, your transportation costs may decrease after retirement. If you must dress for success or are required to buy work uniforms, you may be able to reduce your clothing allowance in retirement. The same applies to lunch expenses. If you’re used to going out for lunch with coworkers on a daily basis, the savings realized by eating lunch at home can be significant.


Fortunately, saving is one thing you probably won’t have to do quite as much of. For example, if you’re currently contributing 20% of your income to your retirement plan, that’s 20% you won’t need to worry about replacing in retirement. Not all your saving needs will go away though. Be sure to account for monthly allowances for items that will eventually need to be replaced, such as major home repairs or automobile purchases. Those expenses aren’t going anywhere, and planning for them should be part of your retirement savings drawdown strategy.

Do What’s Right for You

Once you’ve accounted for how your spending may change in retirement, you may realize that the 80% rule of thumb doesn’t apply to you. For those of us entering retirement debt-free, not having to budget for work-related expenses, health care or retirement plan savings may mean that we can easily maintain our standard of living with 70% or less of our pre-retirement income. However, if your expenses won’t be changing and you have plans to cross big-ticket items off your bucket list, your retirement spending needs might easily exceed 80% of your pre-retirement income.

Either way, taking time to think about and plan for how your expenses will change in retirement will help you to create the retirement budget and drawdown strategy that’s right for you. Consider utilizing the MERS Full Picture report builder, available through your myMERS account, to determine what your desired income replacement rate is based on your customized retirement goals.