The 80 percent salary replacement rule is a common rule of thumb that financial planners have used for years for retirement planning. The 80 percent rule states that retirees will need 80 percent of their pre-retirement income to maintain their same standard of living in retirement. Based on that assumption, retirement planners can calculate how much money a person will need in retirement, and work backward from there to determine an appropriate savings rate.
The 80 percent rule has been around for at least three decades, and was referenced in the 1981 President’s Commission on Pension Policy. The actual number may have been derived by assuming that workers should save approximately 10-15 percent of their total income for retirement, and adding in savings in taxes and other working expenses, like clothes, lunches, and commuting costs. Since retirees no longer need to save for retirement, that’s an “expense” that is eliminated.
Your Mileage May Vary
As with any guideline, specific circumstances can vary from individual to individual. For example, those with higher salary levels need to save more, since Social Security will replace less of their income in retirement. People starting retirement without mortgage payments and a lower cost of living may need to save less. Others may downsize their homes, reducing expenses. Medical expenses are another major variable – poor health could mean increased expenses.
The most important lesson your retirement plan participants can learn from the 80 percent rule is that they need to plan ahead for retirement. If they are saving in an unfocused manner, they’re running the risk of not having enough money to fund a comfortable retirement. FiduciaryFirst can help your employees establish a strong retirement plan that could help them retire on their own terms, with adequate income to enjoy their retirement years. For more information visit www.fiduciaryfirst.com, or call us at 407-740-6111.