11 Jan Are you thinking about the right goal when discussing retirement?

by Howard Hook, CPA, CFP, EKS Associates

Many people in the later stages of their career ask themselves and each other the same question: Do I have enough money to retire?

I think we all agree that those of us who focus on our retirement goals stand a better chance of reaching these goals. Staying focused can mean many things but certainly should include developing a retirement plan, following the plan, and modifying the plan as need be.

However, what can be missed many times is defining what that goal actually should be. Many people define the goal as “I need to have x dollars saved for retirement.” There are several problems with setting this as a goal. For some, the amount is arbitrary and bears little or no resemblance to an accurate number. This, in turn, can lead to wrong actions (such as choosing to stop working too soon or working too long). For others, the amount may be large enough that it intimidates them and shuts them down, resulting in an inability to take any action. We probably have all heard the phrase “I will never have enough money to retire” in conversation.

What then should be the goal so it can be accurately evaluated and not so daunting to stop us in our tracks? Fortunately, I believe there is a goal: income replacement.

Simply put, income replacement is how much of the income you earn today will need to be replaced once that income ends from the various sources of funds available to you once retire. At first glance the answer seems obvious – 100 percent. If I am earning $50,000 today, then once I stop working I will need to replace $50,000 of income. While that’s a good starting point, as it is more likely moored to reality than arbitrarily picking an asset amount, it is not that easy for most people. The type of lifestyle you want once retired can affect the amount of income you need to replace both for the positive (if you expect to spend less in retirement) and for the negative (if you expect to spend more in retirement).

The sources available to draw from may also affect the amount of income you need based on the tax efficiency of those sources. Other than maybe premature distributions from a retirement account, earned income is the most heavily taxed of all the sources of funds. This is because earned income is also subject to payroll taxes in addition to income taxes. Once retired, there are other more tax efficient means of withdrawing money which should be factored in.

A two-step process can help you better identify your income replacement needs in retirement.

First, make a list of what you anticipate your expenses will be once retired. Remember to include expenses that you may not be incurring now (recreation, travel) as well as eliminating expenses you no longer will incur (commuting, work clothing). Also include how your costs may change should you decide to move to another part of the country (in terms of housing, real estate taxes). Do not include income taxes in this list.

Next, from this list, subtract any expected pensions (gross) as well as your expected Social Security benefits (gross). The net amount will reflect the amount of income replacement you will need from your investments once retired. This net amount will then need to be adjusted for income taxes that you may owe. An easy way to come up with an adjusted number would be to divide the net amount by 75 percent. For some it may be helpful to convert this need to a percentage of your current income.

The goal then becomes “in retirement I will need to replace x percent of my current income,” which is more understandable then “in retirement I will need x dollars of assets.”

The final number may need to be tweaked and updated periodically, but should better define your retirement goal helping you remain focused and more likely to succeed.

Howard Hook is a certified public accountant and certified financial planner with the wealth management firm EKS Associates in Princeton. He may be reached at  or (609) 921-1016.

This story was first posted in January 2016.

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