How do you know if you need to save more for your retirement, are right on target, or are going overboard?

The rule-of-thumb formula is to plan to live on 70% to 80% of your preretirement income during your retirement years, while increasing your replacement income annually at the inflation rate for 30 years.

This is a reasonable starting point.

But these assumptions can over or underestimate the true cost of your retirement. One size does not fit all. Your actual replacement income requirements will more realistically range from 54% to as much as 90% of your preretirement income.

One important factor in determining your replacement rate is your proportion of pretax expenses (contributions to a 401(k), for example) to post-tax expenses (contributions to a Roth, mortgage payments, and so forth).

The more you put aside in pretax retirement accounts before you retire the lower your replacement requirements.

To help you evaluate other factors that affect your replacement rate, consider:

  • Some of today’s expenses will decline or disappear when you retire, for example, Social Security and Medicare taxes, saving for retirement, and work-related expenses.
  • As you progress through retirement, even if you take into account the inflation rate for retirees (3.15% compared with a general inflation rate of 3%), your expenses will decrease in real terms at first and then increase toward the end. That’s because your consumption most likely will change over time.
  • The relative amount you’ll spend on insurance and retirement plans will decrease significantly as you age.
  • Your life expectancy might be a lot less, or more, than 30 years. You can use Social Security's online calculator (found on to estimate your life expectancy.
  • If you have a low preretirement income, for example, $20,000 a year, your replacement rate likely will be higher than that of someone who makes $100,000 a year.
  • The relative amount you will spend on health care could increase significantly as you age.
  • After age 65, you stand a good chance (70%) of requiring long-term care and help with basic daily activities, even if only temporarily.

Many households would benefit from claiming Social Security as late as possible. Keep in mind that, by delaying, you’ll get a higher inflation-adjusted benefit for life.