Retirement: How much you'll really need

Ask Money Magazine's undercover financial planner a question. Send e-mails to: themole@moneymail.com.

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(Money Magazine) -- Question: My wife and I are both 55 and plan to retire in two years.

Our combined yearly income is approximately $240,000, and I keep reading that you need 70 percent to 80 percent of your pre-retirement income when you retire.

I may be naive, but I don't think that's true for us. What do you think?

The Mole's Answer: You're referring to an old rule of thumb that financial planners toss around quite a bit, and may I suggest you pretend you never heard it.

Clients often come to me with this same question, and I can't answer it without knowing how much they are spending. Some clients making $100,000 per year are only spending $50,000, while others are earning $110,000 and getting further in debt.

So you should really ask, What percent of my current annual expenditures should I expect to spend in retirement?

The best place to start is determining how much you are spending in pre-retirement. If you're not doing advanced tracking with a software program, then at least have a look at your checking account.

Your current annual expenditures amount to all your income (take-home pay, dividends, etc...) less what you put into savings.

Then you should think about what adjustments you'll make in retirement. Here are just a few life changes that might dramatically reduce expenditures:

Housing: Did you just pay off the mortgage or are you going to downsize the house? The savings could really add up here.

Education Expenses: Are you paying college for the kids and is this an expense that's about to go away?

Auto expenses: Kiss that long commute goodbye, not to mention the bundle you'll save in fuel and maintenance.

Clothes: Maybe you have no more expensive suits to buy and clean frequently.

Unfortunately, retirement can bring about changes that increase our expenditures as well. All of that new found time away from the office also brings additional opportunities to spend money.

Travel: I've found many retirees traveling across the country and the world. In some cases, their pre-retirement expenditures can actually double.

Entertainment: Now we've got more time to golf or whatever we enjoy. If what we enjoy costs money, we need to add it to our budget.

Healthcare: Maybe you're lucky and have an employer that pays healthcare insurance. For the rest of us, we need to take into account insurance premiums, Medicare supplemental plans, out of pocket costs and the like. And these costs are going up much faster than general inflation. Make sure you factor this in to the retirement budget.

There are also some good tools out there to use in this process, such as the AOL Money and Finance Retirement Estimator. They can give you a better idea of what your retirement expenses might be.

After I go over this with clients, I typically see that they are spending just as much after retirement as before. That's just fine as long as you've built up the portfolio to support it.

There are times I'll show a client that their portfolio is not adequate to support their desired retirement expenditures. The response I often get is that they won't continue to spend at this level as they get older. This assumption can be risky since we often find other things to spend money on later in life.

My advice is to figure out what you think you will spend in retirement based on your specific needs and desires. Once you have this amount, add 10 percent to it, because we always seem to have these unexpected expenses that come up.

I take a very conservative stance in this area with my clients. I tell them I'd much rather have them come to me in 10 years and say they wish they had spent more, than have them tell me they are out of money and ask what they do now.