How Much Monthly Income Will You Actually Need in Retirement?

One of the first questions people ask when they start getting serious about retirement is:

How much money do I need to retire?

It is an important question.

But I usually think there is a better place to start.

How much income will you actually need every month once the paycheck stops?

Those are two different questions.

You can have a substantial amount saved and still feel uncertain about retirement if you do not know how those assets are supposed to support your lifestyle.

That is why I like to start with the life someone actually wants to live and work backward from there.

Start with your monthly lifestyle

Before getting too deep into account balances, products, withdrawal strategies, or investment decisions, get a reasonable idea of what retirement will actually cost.

Think about expenses such as:

Housing
Utilities
Food
Transportation
Insurance
Healthcare
Debt payments
Travel
Entertainment
Hobbies
Family support
And the other expenses that are realistically part of your life

The number does not need to be perfect.

The goal is to establish a useful monthly target.

If you believe your retirement lifestyle will require about $7,000 per month, for example, that gives you something concrete to plan around.

Next, look at the income you already expect to receive

Most people are not entering retirement with zero income.

You may already expect money from sources such as:

Social Security
A pension
Rental income
Part time work
Business income
An existing annuity
Other recurring income

Suppose you expect to need $7,000 per month and Social Security plus a pension are projected to provide $4,500.

Now the conversation becomes much clearer.

Instead of asking whether a certain account balance is enough, you can start asking how the remaining $2,500 per month might be generated and how reliable that income needs to be.

That is a much more useful planning question.

Your account balance does not tell the whole story

Two people can retire with the exact same amount of money and have completely different financial situations.

One person may have a paid off home, a pension, Social Security income, very little debt, and relatively modest monthly expenses.

Another person with the same amount saved may still have a mortgage, higher healthcare expenses, no pension, significant travel plans, or family members they expect to help financially.

The account balance matters.

But it only makes sense in the context of the life that money has to support.

Think about the gap

Once you know approximately what you expect to spend and what income is already coming in, you can identify what I call the income gap.

The basic idea is simple:

Monthly lifestyle needs

minus

Reliable or recurring monthly income

equals

The amount your retirement assets may need to provide

That number can become the starting point for a much more productive conversation about retirement.

From there, you can begin looking at which assets are available, how they are positioned, what risks they are exposed to, and how long they may need to last.

Taxes can change the picture

It is also important to remember that not every dollar of retirement income is treated the same way.

Depending on the type of account and the source of the income, taxes may affect how much money is actually available for you to spend.

That means a plan should not only ask:

How much income do I need?

It should also consider:

Where is that income coming from?

Someone who needs $6,000 per month to live may need to generate more than $6,000 in gross income depending on the tax treatment of the accounts being used.

This is one reason I think retirement income and tax considerations should be looked at together instead of as completely separate conversations.

Inflation matters

Retirement may last a long time.

Someone retiring in their early 60s could potentially be planning for decades of expenses.

The cost of maintaining a lifestyle today may not be the same 10, 20, or 30 years from now.

You do not need to predict inflation perfectly.

You do want a plan that recognizes that expenses can change over time.

A retirement strategy that works only if everything stays exactly the same probably is not giving you the full picture.

Your spending may change throughout retirement

Retirement expenses are also unlikely to stay perfectly flat.

Early retirement may include more travel, hobbies, dining out, or other activities.

Later on, some of those expenses may decline.

Healthcare needs may increase.

A mortgage may eventually disappear.

You may decide to help children or grandchildren.

Your priorities can change.

That means retirement planning should have some flexibility built into it rather than assuming every year will look exactly like the year before.

What happens when markets do not cooperate?

There is another question that becomes especially important once you are depending on your assets for income:

What happens if the market has a bad year while you are taking withdrawals?

During your working years, market declines may feel very different because you are still earning income and contributing to your accounts.

In retirement, you may be withdrawing money at the same time.

That changes the conversation.

The goal is not to predict what the market will do next.

It is to understand how your income plan is expected to function when conditions are not ideal.

The question I would rather answer

Instead of stopping at:

Is $750,000 enough for me to retire?

I would rather break the situation down into questions like:

How much do you actually want to spend each month?
What reliable income will already be coming in?
How large is the remaining income gap?
Which assets are available to cover that gap?
How much risk are those assets taking?
How long might the money need to last?
How could taxes affect the amount you actually receive?
What happens if the market declines early in retirement?
What expenses could change later?

Those questions start turning a retirement balance into an actual retirement income conversation.

Retirement changes the job of your money

During your working years, your paycheck does a lot of the heavy lifting.

Money comes in.

You pay your bills.

You save part of it.

You live on the rest.

Retirement changes that.

Eventually the paycheck stops.

Now Social Security, pensions, retirement accounts, investments, insurance strategies, rental income, and other resources may need to work together to support the lifestyle you have built.

That is why I think retirement planning should be about more than reaching a certain account balance.

It should also answer a very practical question:

Where is my monthly income actually going to come from?

A simple exercise you can do now

You can start with three numbers.

1. Your estimated monthly retirement expenses

Think about what it will realistically cost to maintain the lifestyle you want.

2. Your expected recurring retirement income

Include sources such as Social Security, pensions, rental income, or other income you reasonably expect to receive.

3. The difference

Subtract your expected recurring income from your estimated monthly expenses.

That gives you a starting estimate of the income gap your retirement assets may need to cover.

It will not answer every retirement planning question.

But it gives you a much better place to start.

You do not need every answer before having the conversation

A lot of people delay retirement planning because they feel like they should already know all of their numbers.

You do not.

Part of the process is figuring those numbers out.

The important thing is to move beyond the general question of whether you have “enough” and start understanding how your assets, income, expenses, taxes, risk, and goals fit together.

That is when retirement starts becoming less abstract.

And that is usually where a real plan begins.

Want to talk through your retirement income picture?

If you are approaching retirement and want a clearer understanding of where your monthly income may come from, we can start with a conversation about what you have, what you expect to need, and what questions still need to be answered.

Schedule a conversation with Brian

About the author

Brian Daof

Brian Daof is an insurance and annuity specialist with Wilshire Group Financial Services in Los Angeles. He works with individuals and families who want to better understand retirement income, financial protection, and the decisions that come with preparing for retirement.

Educational disclaimer

This material is provided for general educational purposes only and is not intended as individualized investment, tax, or legal advice. Individual circumstances vary. Consult the appropriate financial, tax, or legal professionals regarding your specific situation.