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This Common Retirement Advice Makes No Sense

By Adam Levy - Updated Oct 19, 2017 at 10:30PM

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Have you ever asked how much you need for retirement? The typical answer is often wrong.

If you've ever Googled "how much do I need for retirement?", you've probably come across the common advice that you need to replace 80% of your pre-retirement income. Some even call it "the 80% rule."

Well, as I see it, some "rules" are made to be broken.

There's a major problem with this common advice: What you earn today has absolutely nothing to do with the amount of money you'll need in retirement. But fear not, dear reader: There is a tool that can help determine how much you'll need after you retire.

A smiling man in a suit points with a pen to a document, as he makes a presentation to a couple across the desk.

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Why is the 80% rule so common?

There's a big reason why you see the 80% rule so often: it's easy to use. We all keep track of how much we make in a year. For many, it's just your salary. Sometimes, you have to wait until you do your taxes to get the final total. Either way, we're constantly tracking how much we make, and the government even keeps a nice record of it for us.

So it doesn't take much to take that figure and multiply it by 80% to determine how much retirement income you'll need. And used in conjunction with the "4% rule," it's even easier to calculate a retirement goal -- 20 times your current income.

It takes a lot more work to figure out how much you might really need in retirement. It's hard to estimate expenses or think about how much plans to travel around the world really cost, or how much they'll need saved up for increasing health expenses.

Doing the "hard work" now can pay off later

Fortunately, the hard work isn't so hard.

Remember when I told you there's a tool that really can help determine how much you'll need in retirement? It's called a budget.

Budgets get a bad rap, often because people go about it all wrong. They set aspirational budgets and then fail to meet their goals. Not hitting goals doesn't feel good. And if something doesn't feel good, people usually stop doing that thing.

Instead of just putting random numbers down on a sheet, try tracking your spending for a month, or longer. Figure out how you're spending all of your money first.

You can easily look up your spending history on your credit card and bank accounts, so it might be worthwhile to spend a Saturday morning going through a few months of statements and making a spreadsheet. It doesn't have to be complicated. Just get a few important details, including date, amount, and spending category -- groceries, utilities, entertainment, and so on.

Even just adding up all your expenses from the past three months or so can give you a good idea of how much you spend in a year.

Once you have an idea of how much you're spending today, it'll be a lot easier to estimate how much you'll spend in retirement. If you just want to maintain your current lifestyle but have more time for inexpensive hobbies in retirement, you probably won't need any more than you currently spend. If you expect to do some globetrotting and live a more luxurious lifestyle, your expenses could go up quite a bit. Either way, knowing how much you spend today is a much better starting point than how much you earn.

The 80% rule is the corollary of this other common advice

Most retirement advice is to save around 10% of your salary for retirement. In that light, the 80% rule makes a lot of sense. After factoring in a 10% savings rate and 7.65% for Social Security and Medicare taxes, which you won't pay in retirement, the common 10% advice leaves you spending 80% of your current income every year.

But 10% might be too much for some people, and it might be too low for others. If you know how much you spend, you know how much you're saving. If it's more than 10%, you won't need 80% of your current income in retirement.

What's more, the higher percentage of your income that you save, the sooner you'll be able to retire. If you keep saving until you reach enough to support 80% of your current income, you could end up wasting years of your life just to accumulate wealth you'll never need.

Personal finance is, as the name implies, personal. One-size-fits-all advice like "the 80% rule" makes no sense, but it's really simple. Successful planning requires a bit more work, but it's definitely worth it.

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