The Secrets of the 80% Rule

At some point, the government decided that a retiree needed to only save enough to live on 80 percent of their cost of living. But as an experienced Financial Advisor can tell you, that isn’t a hard-and-fast rule. Everyone needs a different amount to make it from one month to the next, and depending on your post-retirement lifestyle, you may be able to live on less, but it could cost you more now.

The Basics

While preparing to do a study on pensions, the government determined that retirees can live on 80 percent of their working-life salary after retirement. This largely relies on the reduced cost of taxes that occur after retirement, when seniors no longer pay into social security or shell out money for income taxes.

However, a 2008 follow-up study found that the ratio actually varies dramatically depending on a person’s pre-retirement income. Someone making $20,000 a year would need a full 94 percent to live, while an $80,000 earner could live on only 77 percent. The problem with this change is that those making less may have an even tougher time setting money aside for retirement.

Your Reduced Living Expenses

For the individual earner, basic ratios don’t matter — only you can calculate how much you’ll need to live after retirement and what your budget should be. Will you want to have extra money for vacations and weekly dinners out? Do you plan to pay off your house to free yourself of a monthly mortgage payment? Experts also point out that if part of your monthly income goes into retirement savings, you’ll have that reduction in spending immediately. But note that you’ll probably save the most your first year, with your cost of living increasingly slightly in each year that follows.

You don’t have to consult a Financial Advisor to ensure you’re putting enough money aside for retirement. A quick look at your finances and a reasonable estimate of your post-retirement living expenses should give you a good estimate of how much you’ll need to save, guaranteeing you’ll be taken care of through your golden years.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.  

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