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Do You Need 80% of Your Current Income in Retirement?

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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.

Replacement Ratio, Copyright Aon Consulting 2004In 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.

Updated February 10, 2011 and originally published May 7, 2007. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 8 comments… read them below or add one }

avatar Dus10

I have no idea how much I am going to need in retirement. If I am healthy, I surely don’t want to be sitting around my house watching TV all day long; I will want to be traveling. I would imagine taking a few nice international trips each year would be expensive (just a wild guess)… so I don’t think I would want less money, but more money.

If I am not healthy, then I will likely have more expenses.

Either way, it looks like more money is necessary unless you want to veg out in front of the stupid box.

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avatar dimes

I think you should count on needing 100% of your pre-retirement income. 80% is too rosy of an estimate. Yu’ll need it for things like traveling and spoiling grandchildren when you’re younger, then exorbitant health costs when you get older.

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avatar Dave

Here’s how it has worked out for us. When I was working, my disposable income was about 45% of my taxable income:

10% was going into my 401(k)
10% was going into non-qualified investments
7% was going into Social Security
12% was going into my mortgage
16% was going into income taxes.

When I retired, I stopped paying into the 401(k), investments, SS, and mortgage (I paid it off). Reducing my income to keep my standard of living approximately constant cut my income tax by another 10%. So my taxable income early in retirement is about 55% of my pre-retirement income. We still have nice vacations, spoil our grandchildren, and enjoy life, and since we followed the 80% rule, we have more than we need, which has allowed us to support a few charitable causes we like. Social Security supplies about 1/3 of our income needs, and distributions from our IRAs easily provide the other 2/3 using the 4% distribution rule.

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avatar JimmyInGreatLakes

As Dave mentioned, right off the top you will not have to pay 7% towards SS anymore so, assuming the same lifestyle, 93% can be your baseline when figuring out what you can live on.

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avatar fin_indie

Interesting comments by Dave and Jimmy.

One thing I’m not understanding in the Aon study is: are people that were making $90k pre-retirement really getting 33% of their post-retirement income from social security? is that right?! Shocking.

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avatar Dave

What do you find shocking, fin_indie? That it is so high or that it is so low?

According to personal finance writer Scott Burns, even the wealthy need Social Security. You can read his article on this topic at assetbuilder.com/?p=86

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avatar Jessica

Personally, I’m aiming for 100% at this point being 40 some years away from retirement (if I actually retire and do it at 65-ish), and I don’t include SS in my plans. I have plenty of life changes ahead at this point that may change things, but I figure better to aim high than low.

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avatar Teddy

Let’s say I make 100K now. Of that, 7.65K goes to Social Security and Medicare, 15K to income taxes, 23K to 401(k), 6.5K to Roth, 25K to mortgage and mortgage prepayments (to be paid off with two years to spare, so more into savings), 2.5K to vehicle payments, and 3.5K to HSA (the balance of about 40K and growing to pay my Medicare Parts X, Y and Z in retirement). That’s a net of less than 25K, which pays my property tax and insurance, utilities including full-blown cable TV and Internet and boneless sirloin, broccoli and vodka. My goal is to have more money in the bank after my first year of retirement than I did when I retired, without working the front door at Walmart or Sam’s Club. I’ve got everything I need right here and I don’t intend to get hijacked or carjacked or shot during an armed robbery at IHOP…I’ll sleep with my iPhone and 9mm. Come and get me!

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