A classic retirement preparation rule states that you should retire on 80% of the income you earned in your last year of work. Is this old axiom still true, or does it need reconsidering?
Some new research suggests that retirees may not need that much annual income to keep up their standard of living.
The 80% rule is really just a guideline.
It refers to 80% of a retiree’s final yearly gross income, rather than his or her net pay. The difference between gross income and wages after withholdings and taxes is significant to say the least.1
The major financial challenge for the new retiree is how to replace his or her paycheck, not his or her gross income.
So concluded Texas Tech University professor Michael Finke, who analyzed the 80% rule and published his conclusions in Research, a magazine for financial services industry professionals. Finke noted four factors that the 80% rule does not recognize. One, retirees no longer need to direct part of their incomes into retirement accounts. Two, they no longer involuntarily contribute to Social Security and Medicare, as they did while working. Three, most retirees do not have a daily commute, nor the daily expenses that accompany it. Four, people often retire into a lower income tax bracket.1
Given all these factors, Finke concluded that the typical retiree could probably sustain their lifestyle with no more than 77% of an end salary, or 60% of his or her average annual lifetime income.1
Retirees need to determine the expenses that will diminish in retirement.
That determination, rather than a simple rule of thumb, will help them realize the level of income they need.
Imagine two 60-year-old workers, both earning identical salaries at the same firm. One currently directs 25% of her pay into a workplace retirement strategy. The other directs just 5% of her pay into that strategy. The worker deferring 25% of her salary into retirement savings needs to replace a lower percentage of their pay in retirement than the worker deferring only 5% of hers. Relatively speaking, the more avid retirement saver is already used to living on less.
This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.
New retirees may not necessarily find themselves living on less.
The retirement experience differs for everyone, and so does retiree personal spending. A recent Employee Benefit Research Institute survey found that over a third of retirees report spending more than they had originally expected. Only 9% reported that they were spending less than they had expected.2
A timeline of typical retiree spending resembles a “smile.”
A study from investment research firm Morningstar noted that a retiree household’s inflation-adjusted spending usually dips at the start of retirement, bottoms out in the middle of the retirement experience, and then increases toward the very end.3
There will be some out-of-budget costs, of course, ranging from the pleasant to the unpleasant. Those financial exceptions aside, abiding by a monthly budget (with or without the use of free online tools) may help you to rein in any questionable spending.
Any retirement income strategy should be personalized.
Your own strategy should be based on an accurate, detailed assessment of your income needs and your available income resources. That information will help you discern just how much income you will need when retired.
One well-known method is the 80% rule. This rule of thumb suggests that you'll have to ensure you have 80% of your pre-retirement income per year in retirement. This percentage is based on the fact that some major expenses drop after you retire, like commuting and retirement-plan contributions.
The typical rule of thumb is retirees should ideally replace 80% of their gross pay, so if you have a $50,000 annual salary, you would ideally want to replace $40,000 of that.
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960 until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67.
The “Rule of 80” (or “Rule of 90” for MSEP 2011 members) simply allows some members with many years of service to reach normal retirement age sooner than they otherwise would. If your years of service plus your age equal 80 or more (90 or more for MSEP 2011), then you may reach retirement eligibility sooner.
Member must cease employment on date specified in surplus notice. Age + pension credit = at least 80 on member's last day of employment. The time limit can be from 30 to 60 days, at the employer's option.
According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.
According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
It is 100% possible to retire with $400,000, provided you're not looking to enjoy a particularly expensive retirement lifestyle or hoping to leave the workforce notably early.
Social Security survivors benefits are paid to widows, widowers, and dependents of eligible workers. This benefit is particularly important for young families with children.
Have you heard about the Social Security $16,728 yearly bonus? There's really no “bonus” that retirees can collect. The Social Security Administration (SSA) uses a specific formula based on your lifetime earnings to determine your benefit amount.
Social Security income can be taxable no matter how old you are. It all depends on whether your total combined income exceeds a certain level set for your filing status. You may have heard that Social Security income is not taxed after age 70; this is false.
If you are not 100% vested, you might not be allowed to access the total amount of money contributed to your account by your employer. For example, if you have $10,000 of profit-sharing money in your account, but you're only 80% vested, you would likely receive just $8,000 of that $10,000 balance.
Early retirement benefits will continue to be available at age 62, but they will be reduced more. When the full-benefit age reaches 67, benefits taken at age 62 will be reduced to 70 percent of the full benefit and benefits first taken at age 65 will be reduced to 86.7 percent of the full benefit.
With the golden rule, the ratio between your coordinated wage and the projected old-age pension at the time of ordinary retirement always remains the same, regardless of whether the rates are 1% or 2%. The golden rule is essential for calculating the appropriateness of pension plans.
The 70% rule for retirement savings says your estimated retirement spending will be 70% of your pre-retirement, post-tax income. Multiplying your post-tax income by 70% can give you an idea of how much you may spend once you retire.
Introduction: My name is Pres. Carey Rath, I am a faithful, funny, vast, joyous, lively, brave, glamorous person who loves writing and wants to share my knowledge and understanding with you.
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