Retirement: The 80% rule?

Are You Saving Too Much for Retirement?


Retirement planning almost always starts with one number: A guesstimate of the percentage of pre-retirement income you're expected to need after you retire. That's called the "replacement rate" and is often pegged by industry experts at around 80 percent of a household's earnings.

For example, a recent paper from the Center for Retirement Research at Boston College titled "How much to save for a secure retirement," relies on that 80 percent figure. "Households with earnings of $50,000 and over needed about 80 percent of pre-retirement earnings to maintain the same level of consumption," writes Alicia Munnell, author of the study.

She goes on to say that high earners need to save extremely high percentages of their income -- as much as 77 percent for the 45-year-old just starting to save for retirement at age 62 -- to produce that 80 percent.

The concept underlying Munnell's paper, and a lot of other retirement planning advice, is that you can figure out how much you need to save once you have a number for that 80 percent replacement rate.

But there's reason to believe that oft-quoted 80 percent figure is wildly on the high side. That, in turn, makes the retirement calculations based upon it also wildly off. And that means if you're trying to save enough money to produce that 80 percent figure, you may be putting away too much, or skimping unnecessarily on the early years of retirement.

Comment: Our story. We did not even think about retirement until 20 years ago. Well I thought about it for a long time (I have a degree in finance!) but we really did not begin to seriously save for it until 20 years ago when Kathee was hired by Norwest and she began to save in a 401K. There is no way we will come close to the 80%.

The best plan: start saving right out of college. Maybe: give 10% and save 10% (my Pastor recently suggested this).


  1. My thoughts - You can never have too much saved, though "skimping unnecessarily" is certainly possible. I have always thought the 80% figure was too high (some recommend 100%). I personally think 50-60% is more realistic, but it obviously depends on your circumstances. To arrive at that figure, I look at expenses/income reductions as a percentage of current income that will not be present during retirement years:

    - FICA at 7.65% (reduced this year, and possibly in the future; conservatively use 5% figure).
    - Savings specifically designated for retirement - 10% is a good rule, as you suggested, and is what I use (hey, I like your (my) Pastor and his suggestion!)
    - Housing costs (mortgage P&I - I plan to not have a house payment during retirement years) - Easily 15-20% for most people, higher for many others; conservatively use 15% figure.
    - Other taxes - if your taxable income is 50% of current, your overall tax bill will be lower, and quite possibly put you in a lower bracket; plus, if you have significant income that is not taxable (e.g., from a Roth IRA), it could be even lower; conservatively use 10% figure.
    - Income sources other than retirement savings to replace income (e.g., - Social Security, pension) - while pensions are becoming less common, and who knows whether Social Security will even be there when I retire, it is likely that there will be something to draw from. The last statement I got from SSA projected that I would receive approx 25% of current income; I conservatively use a 10% figure.

    So if you add those figures up (5%+10%+15%+10%+10%) , I can realistically reduce my current income by 50% and effectively have the same standard of living. There are many other factors to consider, such as additional medical expenses, travel, etc., but it is a good starting point. I'll have to send you the spreadsheet I developed that allows you to see if your current savings plan is allowing you to meet your retirement goals.

    Don Steinhart

  2. Amen. I've always found some amusement in the calculations that one "needs" 25x one's income to retire, which more or less assumes 4% or less interest on securities. On the flip side, financial advisors promise closer to 7-10%.

    OK, which is it? Personally, I'm expecting a fair amount of trouble as boomers retire, which means a bit part of my retirement plan is called "six kids."

    Bert (for Don's benefit)


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