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Retirement Need Analysis: How Much of My Current Income Will I Need for Retirement?

Jorge Ruiz-Menjivar and Martie Gillen


A common question when planning for retirement is "How much money will I need during that stage of life?" The answer varies by individual and that person's objectives. Several factors play an important role in answering this question. One main factor is the desired standard of living. In general, most people entering into retirement intend to maintain the same preretirement lifestyle. Lifestyle changes could decrease or increase income needs once an individual retires. Additional spending such as entertainment, eating out, travel, vacation, and other changes might increase expenses. However, these lifestyle expenses are discretionary and can be adjusted to fit a person's budget.

Another factor to consider is that expenses related to employment (e.g., clothing costs, meal costs, parking, gas, etc.) and payroll taxes (e.g., FICA-federal payroll tax) generally decrease during retirement years. On the other hand, some personal expenses such as health-related expenses may increase. Table 1 provides a list of general elements that impact expenses during retirement years.


Figure 1. The amount of money needed for retirement varies from person to person. There may not be an exact amount, but there are ways to estimate the amount you will need.
Figure 1.  The amount of money needed for retirement varies from person to person. There may not be an exact amount, but there are ways to estimate the amount you will need.
Credit: iStockphoto


Wage Replacement Ratio

There is not a single "magic number" that guarantees an adequate retirement. But many indicators and methods can help estimate and determine a reasonable amount appropriate for your needs during retirement. One of these indicators is the wage replacement ratio (WRR).

The wage replacement ratio indicates the percentage of current annual income that an individual will need during retirement to maintain the same preretirement lifestyle. On average, many financial planners report that clients need approximately 70%–80% of their preretirement income to retire and maintain the same lifestyle (Dalton 2008).

Experts recommend that a replacement wage ratio of 70%–80% is appropriate at the beginning of the retirement stage. Studies suggest that consumption usually declines as people get older. More precisely, results indicate that after age 80, there is an evident reduction in consumption; however, be aware that some other expenses might rise during the latter part of retirement (e.g., medical costs).

Two different approaches used to calculate this helpful indicator (WRR) are the top-down and bottom-up. Below, each approach is explained, and examples are provided to illustrate their application. However, in practice, calculations can be more detailed if additional factors are considered (e.g., inflation, rate of return on investment, Social Security benefits, etc.).

Top-Down Approach

This method is very intuitive and uses known percentages of your current financial situation to estimate the wage replacement ratio (WRR). Often, this approach is used with individuals whose income and expenditure trends are expected to vary over time. For example, younger individuals will likely experience more changes in income and expense patterns than those near retirement age.

As an example of this approach, let's assume Michael is 32 years old and earns $35,000 a year before taxes. He pays 7.65% of his gross income in payroll taxes (FICA, Social Security, and Medicare). Also, Michael annually saves 5% of his gross income and puts another 3% in his retirement plan as a minimum requirement from his employer (this will vary by employer). Thus, the WRR is 84.35%, meaning that during retirement he would need approximately $29,522.50 per year to maintain his current lifestyle. Table 2 shows the step-by-step calculation of WRR under this method.

Bottom-Up Approach

The bottom-up approach is a more comprehensive method to calculate the wage replacement ratio (WRR). It takes into consideration a more detailed list of current expenditures, enabling a more accurate estimate of future expenditure patterns and retirement needs. This approach is often used with individuals closer to retirement (usually these individuals' expenditures and income are less subject to changes). Because the bottom-up approach considers the main elements of a budget, this method is also known as a budgeting approach.

To illustrate this approach, consider the following example. Wendy, age 54, has the current income and expenses listed in Table 3. Her retirement objectives are to have no mortgage payment during retirement and to maintain her current lifestyle. As previously discussed, some expenses, such as consumption of goods and work-related expenses, are expected to decline during retirement years. Those estimated declines are reflected in Wendy's retirement budget shown in Table 3.

By using the bottom-up (budgeting) approach, the WRR for Wendy is 58.18%. In other words, during retirement years, she would need 58.18% of her current income to maintain her current lifestyle; that is a total of $37,820. Note that neither preretirement nor postretirement inflation is considered in this calculation.


While no "magic number" exists for the amount you should save for retirement, there are calculations you can use to estimate the amount you will need. Calculating your wage replacement ratio (WRR) using either the top-down or bottom-up approach can help you determine how much money you should put aside for retirement and provide you with savings goals.

For more information on retirement financial planning, see other EDIS publications at


Dalton, M. 2008. Retirement Planning and Employee Benefits for Financial Planners, fifth edition. S. Rose, LA: Money Education.


Table 1. 

Factors that impact expenses during retirement.

Factors that might decrease your income needs

Factors that might increase your income needs

Social Security payments

Health-related costs

Expenses associated with employment (e.g., transportation, clothing, etc.)

Lifestyle adjustment (e.g., more travel,

hobbies, clubs, or other activities)

Automobile insurance

Home maintenance and repair

Lifestyle changes

Table 2. 

Sample wage replacement ratio (WRR) calculation using the top-down approach.


Dollar amount





Less: Payroll taxes (35,000*7.65/100)



Less: Current savings (35,000*5/100)



Less: Required contribution to retirement plan (35,000*3/100)



Wage Replacement Ratio



Table 3. 

Sample wage replacement ratio (WRR) calculation using the bottom-up approach.


Current budget

Retirement budget

Current Income





Income taxes*



Social Security taxes






Homeowner's insurance



Health insurance



Car payment



Auto insurance



Auto maintenance
























Total expenses (needs)



Wage Replacement Ratio

(Total expenses/income)*100



*Assume that income tax liability will remain the same during retirement year; in this case, 25% tax bracket.


Also Available in: Español

Publication #FCS7251

Release Date:March 16, 2018

Reviewed At:February 4, 2022

Related Experts

Gillen, Martie


University of Florida

Ruiz-Menjivar, Jorge H.


University of Florida

Related Topics

Fact Sheet

About this Publication

This document is FCS7251, one of a series of the Department of Family, Youth and Community Sciences, UF/IFAS Extension. Original publication date February 2013. Visit the EDIS website at for the currently supported version of this publication.

About the Authors

Jorge Ruiz-Menjivar, assistant professor; and Martie Gillen, associate professor, Department of Family, Youth and Community Sciences; UF/IFAS Extension, Gainesville, FL 32611.


  • Jorge Ruiz-Menjivar