Chances are, you will not need the same income during your retirement as you needed during your working years. That is because some of your expenses will likely decrease or even go away completely once you quit working.
Take retirement plan contributions, for instance. You will not need to make those while you’re in retirement because, well, you will be in retirement. And also, you may have a paid-off house in retirement, and that alone can amount to big savings.
But still, you should try to only take about a 20% to 30% cut in pay during retirement, because you will probably require around 70% to 80% of what your income was prior to retirement to live comfortably. But if you find yourself making this one mistake, you might end up with an even more substantial cut in pay on your hands.
Can you live on just 40% of your salary?
A lot of people are used to having to live frugally and plan to live frugally during retirement. But even so, you might find that you still require a big chunk of your prior earnings to stay at a decent standard of living.
If you retire on SS alone, though, the pay cut you will take could easily amount to around 60%. That is because Social Security benefits will only replace around 40% of the wages you earned while working if you earn an avg. income. And chances are, that is too big of a pay cut for anyone to manage.
While it is true that a few of your expenses may drop during retirement (like housing), some other living costs may increase. For one thing, not having a job will mean extra hours during the day that you need to fill, and it may cost a large amount of money keep you entertained. And if you would like to spend a some of that free time traveling, you will definitely need a big chunk of cash on standby.
Also, as you age, your health tends to, at the very least, need more attention. That might result in increased healthcare costs.
In fact, the costs of Medicare premium have increased a lot, so there is no reason to believe that trend will go away anytime soon. And that alone is good enough reason to not subject yourself to taking a 60% cut in pay as a senior.
A better plan
If the idea of you having to live on 40% of your prior earnings scares you, then there is a simple solution — save money so you have income that will supplement your SS benefits. If you sock away $500 each month in an 401(k) or IRA plan over a span of 30 years, and your invested savings deliver an avg. yearly 7% return (which is several percentage points under the stock market’s avg.), you will end up with about $567,000 to your name.
Of course, there are a few other ways could supplement your SS benefits, like having a part-time job as a senior or renting a section of your home out (a viable solution if you are not planning on downsizing). The key is to not having to rely on those benefits alone — not unless you are comfortable with the idea of taking a huge pay cut for life.