How We Use Your Income to Calculate Retirement Spending
Learn how your current income plays a role in calculating your desired retirement spending level in the future.
Your current income and retirement income are not only linked to your savings rate, but are also linked to your propensity to consume, or the percentage of your income that you’re actually spending to support your lifestyle.
Betterment has built the only free retirement planning calculator that takes your propensity to consume into consideration when providing retirement planning advice.
Betterment’s retirement calculator helps you determine what your desired spending will be in retirement.
To provide you with information about your potential replacement spending in retirement, our calculator does the hard work of calculating factors like changes in taxes, income, Social Security benefits, interest rates, the mix of account types in which you are invested, and more.
In this article, we examine one variable in this complex calculation, which is how your current income impacts your desired spending in retirement.
How Your Current Income Influences Retirement Spending
Your current income is not only linked to your savings rate, but it is also linked to your propensity to consume, or the percentage of your income that you’re actually spending to support your lifestyle.
Research published by the American Economic Association and National Bureau of Economic Research has shown that lower-income households tend to spend close to 100% of their income. Households with high incomes tend to spend closer to half of their net income with the rest going to taxes and savings.
Our retirement advice takes your current income and then estimates how much you are likely to earn in the future, given the remaining time until your retirement. We then estimate how your income is divided among spending, taxes, and annual savings, and that the ratio between these categories varies with your income.
As you provide us with more information (e.g., how much you plan to save annually, where you live currently, where you may live in retirement, when you plan to claim Social Security benefits, etc.), we improve the projected divisions among spending, savings, and taxes. Our baseline assumptions are shown in the chart below (note: the chart doesn’t show any of your personal factors that we would take into account, such as your savings rate and the cost of living for your location).
Assumed Spending, Taxes, and Savings Before Retirement
Shown as percentage of income by annual household income level
As far we we know, Betterment has built the only widely available and free retirement planning calculator that takes your propensity to consume into consideration when providing retirement planning advice.
Financial advisory services are only provided to investors who become Betterment clients pursuant to a written account agreement, which investors are urged to read and carefully consider in determining whether such agreement is suitable for their individual facts and circumstances. To learn more, please search for Retirement Plan Advice Methodology on Betterment’s site. For further disclosures, please read www.betterment.com/legal or www.betterment.com/retirement
Basics of a 401(k) Plan
Today’s 401(k)s hold more than $5.9 trillion in assets with over 100 million people contributing. But what is a 401(k) and would your company benefit from one?
Compound Interest Can Help Make You Rich
Don’t miss out on one of the most powerful tools you have at your fingertips.
How to Do a Direct IRA Transfer
If this is your first direct IRA transfer, don’t worry. We help process direct IRA transfers every day, and we’re here to make it as easy for you as possible.
How would you like to get started?
Manage spending with Checking
Checking with a Visa® debit card for your daily spending.
Save cash and earn interest
Grow your cash savings for general use for upcoming expenses.
Invest for a long-term goal
Build wealth or plan for your next big purchase.
Invest for retirement
Set up traditional, Roth, or SEP IRAs to save for the golden years.