Picture your retirement lifestyle. Where would you like to live? Would you like to travel? Spend more time with family?  Just how much you need for retirement will depend on your retirement goals and lifestyle. Estimating the cost of retirement can help you make a plan to reach those goals.

The Wage Replace Ratio (WRR) method is a shortcut method that uses a percentage of income to calculate the cost of retirement. WRR takes into account that pre-retirement and post-retirement expenses will change. Expenses like Social and Medicare taxes (7.65%) and retirement savings contributions will end.

A WRR of 70 – 80% is thought to be reasonable. The next step is to estimate how many years you will be working and factor in an average yearly salary increase. Then you can calculate the final year of income and multiply that by your WRR.

Example: Angela, age 45, plans to work 20 more years. Her current annual income is $60,000 and anticipates average annual salary increases of 3%. She uses those numbers to calculate a final annual income of $108,367. She uses a WRR of 75%. (.75 * $108,367)

Her first-year projected retirement income need is $81,275. She expects to be in retirement 20 years and inflation to average 3%. Using those numbers, she calculates a total retirement income need of $2,249,407. She further projects that Social Security will cover 40% of that amount. So, the estimated need from other sources is $1,349,644.

As Angela gets closer to retirement, she can fine tune her estimates to consider more specific details of her anticipated retirement income needs.

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