There are many different ways to estimate how much money you’ll need to retire, but many so-called “rules” are based on your income. If you want a more accurate picture of your retirement needs, calculate based on your spending.
As personal finance site Money Boss points out, calculating your retirement needs based on your typical income can lead you wildly astray if your spending doesn’t match your income level (and if you’re saving enough then, by definition, it shouldn’t). Instead, take a look at your spending levels to get an idea of how much you’ll need to spend in retirement:
Say you make $US50,000 ($65,938) a year but spend $US60,000 ($79,125). In this case, your income understates your lifestyle by $US10,000 ($13,188) a year. If you based your retirement needs on your income, you’d be screwed.
On the other hand, if you’re a money boss who saves half what she earns, you’d only spend $US25,000 ($32,969) of a $US50,000 ($65,938) salary. Basing your retirement needs on your income would cause you to save much more than you need. You’d be working long after the point at which you could retire safely.
Of course, in both cases you deal with problems like inflation, or the fact that (ideally) you won’t still be paying for your house or other long-term debts when you retire. However, gauging your spending habits — how much you want to travel, how expensive your area is to live, etc. — can give you a better idea of what target you need to shoot for.