If you’re planning for retirement, you might be concerned with determining how much income you’ll need to support your current lifestyle. I’ve seen 80% tossed around as this magic percentage. That is, if you make $100,000 in your current lifestyle (and manage your expenses appropriately), the fewer expensive you’ll have in retirement mean you’ll only need $80,000 in annual income.
This is one of those “all other things being equal” types of rules of thumb. It may be good as a starting point for determining how much to save for retirement, but it probably won’t be accurate for most people. It’s also one of those “statistics” whose intent is to spur people into action and take a look at their savings plans.
Here is a little bit about what financial advisors and brokers say about how much to save for retirement. Schwab says spending 80% of your pre-retirement income is a reasonable assumption (unless you are 60 years old and haven’t saved anything yet). Fidelity says that “most people will require 60% to 80% of their current income to maintain their current lifestyle in retirement.”
The Journal of Financial Planning, in a recent study, took a different approach by using 80% of current net income — what’s left after saving for retirement — as a target.
We used net income because someone who saves for retirement has reduced their pre-retirement living expenses and, for most, it typically follows that they also reduce their post-retirement expenses.
In 2004, Aon Consulting performed a study [pdf] taking a look not at predictions, but real data. The firm found a difference between actual retirement income based on ranges of pre-retirement income. See the chart on the right to get an idea of what retirees formerly in your income range are living on.
Walter Updegrave, CNN Money’s expert, tackles this question as well. Updegrave stresses that all rules of thumb must be taken with a grain of salt. I agree the most with this statement:
As you get closer to retirement – say, within five or 10 years – a clear picture should begin to emerge of what expenses you’ll actually face in retirement. At that point, you can start factoring in actual estimates of your retirement spending into your planning. The more detailed and accurate the estimates, the better the sense you’ll have of how large a nest egg you’re likely to have and how long it’s likely to support you.
I am hoping that when I retire — and I hope to live that long and to be able to retire at some point — I will have the desire to do much more with my life, such as traveling and enjoying the things I can’t while being tied down to trading my time and effort for money. To live a full life in retirement, I may need more than my maximum pre-retirement income. Like Updegrave says, when the time grows closer — 30 years from now or so — I’ll be able to make better estimates.
Until then, I’ll just save as much as reasonably possible.
To track your retirement savings, check out Personal Capital’s free financial dashboard.
Updated October 13, 2016 and originally published May 7, 2007.