For years, financial planners have advised clients to replace 80% of their pre-retirement income in order to live comfortably in retirement. This has been the rule of thumb when planning retirement savings, but you may need less retirement income than you think.
Here are a few reasons why the “80% income-replacement rule” may not be realistic:
- The 80% should be a replacement for your take home pay, not gross income
- You will no longer be paying into your retirement investments
- You will likely drop into a lower tax bracket
- No more paying for FICA taxes (Social Security & Medicare)
- Less commuting & buying clothes for work
- Many big ticket items may stop such as paying a mortgage or you may downsize your home
- No more expenses for raising children including saving for education
- At some point you will be receiving Social Security benefits
- You may no longer need life and disability insurance
There are, however, some costs that are likely to increase in retirement:
- Medical costs increase (co-pays, health issues, long-term-care, copays and deductible)
- Travel expenses
The 80% rule is not a bad rule, but it is not one that is “one size fits all”. It should be adjusted according to your personal financial situation. In order to determine how much savings you need to maintain your desired standard of living in retirement, it is important to know how much you spend now and how much you plan on spending after retirement. You will need to understand the value of your retirement benefits, such as any Social Security and any pension income. Also, be aware of the tax changes in retirement. It is important to periodically update your analysis to monitor your progress and make any changes to your assumptions as needed.
Carol Chaudet
(12/4/15)