The 80% rule is the rule most often cited by retirement planners. This rule of thumb states that, in retirement, most people will need an income equal to between 75% and 80% of their pre-retirement income to maintain their pre-retirement lifestyle. The average of the two percentages, 80%, gives the popular rule its name. If you’re one of those people who can live on 80% of your salary, that’s wonderful. But for many of us, paying all the bills on 80% of our current salary would be impossible, and leave us strapped for cash as retirees.
The rule is based on the idea that a retiree’s income goes down by approximately 25% once he or she is retired. It’s true that there are certain things you won’t need to pay for once you’re no longer part of the workforce. You may be able to move to a less expensive place which is further from your former place of employment. And you can quit gassing up the SUV every few days. But there are other parts of the equation that may have nothing to do with you.
A financial retirement calculator will most probably make the assumption that you’re not holding a mortgage on your home and that your children are no longer living with you. And perhaps this is true. But since many Baby Boomers married late and waited to start families, there are lots of soon-to-be retirees who still have kids living with them, children they’re putting through college, and children who have graduated but have come home to live, due to the difficulty of find jobs. These people may find their expenses going up, rather than down. This means they’ll have to come up with a whole new model for themselves and would do well to look into getting some retirement planning help.
Don’t Assume the Kids Will Be “On Their Own”
The bottom line is that if you put off having a family until you were in your 40s, that you may still have that family living with you when you’re ready to retire. And with today’s economic downturn, you may have children living at home who would have been in the workforce, if they could find a job. Now, you may love having your kids home, but kids are an expensive proposition!
Did you get a second mortgage to help the children pay for college? If so, you won’t be able to be mortgage free when you retire, as most retirement planners suggest. And how can you sell your big house and move into your smaller retirement condo when the children are still living with you?
Early Retirement = More Savings Needed
Early retirees actually spend more money than those in the workforce. They simply have more time and plenty of energy to spend traveling and taking part in expensive leisure activities.
If you know that the possibility exists that you may be living in retirement for many years, you should also know that you had better have enough money put away so that you can live on the income from the principal of your savings, rather than the principal itself. It will be smarter to assume that you’ll need 110% of your retirement income in retirement than it is to assume that you can live on 80%.
And retirement doesn’t mean you won’t have to pay taxes. In fact, what with Social Security, income from investments, and retirement account income, you could be paying just as much in taxes, if not more! And don’t forget to factor in property taxes. Even if you’ve paid off your mortgage, you’re still going to have to pay property taxes, if you were paying them when you were working.
Rising Healthcare Costs are Inevitable
Perhaps your health is impeccable now but don’t count on it staying that way. Living a healthy lifestyle can certainly keep you healthier. But as we age, healthcare costs tend to go up. And healthcare costs, in general, have been rising and this trend shows no signs of changing. Should you have an accident, or suddenly become ill, or even need long-term care, you could watch your savings quickly disappear.
Don’t Depend Solely on Statistics
The U.S Department of Labor’s Consumer Expenditure Survey offers statistics that tell us that retirees actually do spend less money than people who are still in the workforce. Ty Bernicke, financial planner, cites these surveys in an article in the Journal of Financial Planning. He says that statistics show, that for every 10 years past the age of 55, that people spend about 25% less. Once someone reaches the age of 75, they will spend half as much as someone between the ages of 45 and 54 will spend.
The loophole in these statistics is that they don’t take inflation into account and they don’t take unexpected expenses into account. Not taking these things into account can make for a huge problem when computing how much money you’ll need in retirement. Everyone needs to look carefully at their own style of living and how much they spend before making their own retirement plan.
What Will YOUR Retirement Cost?
Take the time now to sit down and figure out your fixed expenses – those bills that you have to pay each month – and then figure out which ones will be carried into retirement. Then think about what you’d like to do in retirement that will cost money. If you love to travel or have hobbies you want to spend more time doing, figure in the costs of these activities.
Long term care insurance is a good investment for retirees. It can be costly, but it’s nowhere near as expensive as actual long term care. Also see if you can come up with some sort of plan to pay off your existing mortgage. This will eliminate a big bill in retirement. And never, ever, forget about inflation. Inflation can dramatically affect retirement savings.
Maybe the figure you come up with will hover right around the touted 80% mark. But in reality, you’re going to need closer to 90% of your income to retire. This percentage will lessen as you age. Always tailor your personal retirement calculations to your own needs and wants in retirement so that you’re sure to know how much you need to retire.