• Reduced Savings - You probably will not be saving for retirement during retirement.
• Reduced Taxes - FICA (Social Security) taxes will be reduced if you are not "earning" income.
• Reduced Work Related Expenses - These include commuting, work clothes, etc.
• Reduced Monthly Expenses - Ideally, if you paid off the mortgage on your primary residence, you will not have a monthly mortgage payment.
• Increased Travel and Entertainment - During retirement you may travel extensively, eat out more often and enjoy some of the recreational activities (golf) that you did not enjoy previously.
• Increased Medical Expenses - As we get older, we tend to utilize the services of physicians more often than when we were younger.

Each individual will have their own circumstances that will dictate what their own unique retirement needs are. If your former employer provides medical benefits during retirement, you may not have to adjust your lifestyle for increased medical expenses. Also, if you plan to continue working during retirement, you will still incur work related expenses and social security taxes.

We will now look at a "typical" example. Assume Jay and Ann want to determine the amount of income they will require during retirement. This couple has been saving 10% of their salary in a tax deferred retirement plan. Jay has always dreamed of retiring in Florida and Ann wants to be near the kids who moved south to get away from the Northeast winters. Furthermore, Jay commuted to the Big Apple every day and they plan to have their mortgage paid off by the time they retire. Jay's employer also will provide retirement medical benefits.

We will now determine the couple's retirement needs in terms of dollars and as a percent of income.
INSERT TABLE HERE.

The amount of income or percentage of income necessary for retirement needs is referred to as the Wage Replacement Amount or Wage Replacement Ratio. Typically, financial publications report that an individual's Wage Replacement Ratio should be 60-80% of current income. The table above illustrates the reasoning behind the 60-80% rule. In this example however, we assumed the couple was saving 10% of their salary and this may not be the case. Also, lifestyle changes during retirement can be different than the example above. There are cases where an employer will provide lodging to an employee for the convenience of the employer. An example might be a resort or a hotel manager. It is conceivable that the individual will have higher needs during retirement than during employment because the individual will have to pay for housing during retirement. Each individual should analyze their own situation to determine what amount or percentage to use as their Wage Replacement Amount or Ratio. We will use the example above later on when we determine what amount is required to retire.

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