Most financial websites suggest you need to replace 80% of your pre-retirement income to maintain your lifestyle. However, this common benchmark often uses gross income, which can lead to a misleading and overinflated target for your retirement plan.
Focusing On Net Income Over Gross
If you calculate your retirement needs based on your gross income—the total amount you earn per year—you are including money you don’t actually live on. This figure includes deductions for 401(k) contributions, Social Security, Medicare, and various income taxes that won’t necessarily look the same in retirement.
The number that truly matters is your net income—the amount that actually hits your bank account each month. This is your “real burn rate,” and it represents the lifestyle you are actually spending and living on today. A more practical approach to planning is to add up these actual deposits to determine exactly what your retirement assets need to replace.
In retirement, if your income plan can match or exceed that net number, your lifestyle stays the same. You may even find that you want more income for travel or hobbies, but you’ll have a much more accurate sense of whether you are on track by focusing on your net cash flow rather than a theoretical percentage of your gross earnings.
Key Takeaway
Retirement planning is more accurate when you focus on replacing your net take-home pay rather than a percentage of your gross salary.
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Full Script
When financial websites say you need to replace 80% of your pre-retirement income, they’re using gross income. But that’s not what you actually live on.
If you’re thinking in terms of your gross income, how much you earn per year, you’re missing the deductions for 401(k) contributions, as well as Social Security, Medicare, and income taxes.
What hits your bank account is your net income. That’s what you actually spend and live on. A more practical approach is to add up what actually hits your accounts each month; that’s your real burn rate.
In retirement, if your income plan can match or exceed that net number, your lifestyle stays the same, or you might want to actually have more income in retirement. But you’ll have a much better idea if you’re on track by focusing on your net income.