There's a reason people are advised not to retire on Social Security alone. Those benefits, if you're an average earner, will only replace about 40% of your pre-retirement wages. And it's common for retirees to need about twice as much income as that.
The logic behind the so-called 80% retirement income rule is that replacing the majority of your paycheck should allow you to maintain the standard of living you're accustomed to without having to make too many sacrifices. If you're saving 10% or more of your salary for retirement and have a paid-off home by the time your career ends, it's easy to see why 80% of your former wages would more than suffice.
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But while it's not a bad idea to aim to replace 80% of your paycheck in retirement, it may not be necessary. This especially holds true if one key factor applies to you.
Do you have children?
Even though you might manage to shed certain expenses in retirement, the majority of your bills are likely to stay the same. You'll still need to pay property taxes and maintenance on a home, have a car or other means of transportation, eat, and take medication. You'll still need entertainment -- and in fact, you may need more of it once you no longer have a job to occupy your time.
For this reason, it's a good idea to aim to save enough to replace 80% of your paycheck. But you may have some wiggle room with that number if you intend to seriously downsize your lifestyle, or if you're a parent.
Being a parent is expensive, especially if you have multiple children. But once your children leave the nest and venture out on their own, there's a good chance a large number of your expenses will go down.
Say you're a family of four. It's cheaper to feed two people than twice that many. And your utility bills are apt to be lower if only half as many people are bathing and watching TV on a regular basis.
Also, if you have kids, you may be shelling out money when they're younger on things like music lessons, sports, and summer camp. When they're a bit older, you may be paying to keep them on your health insurance plan or covering their car insurance bills (and maybe also paying for their cars, too).
Ideally, your children will one day become functional adults who don't need your financial support. And that means you may be able to get away with replacing a lot less than 80% of your paycheck in retirement.
Consider your personal circumstances
Retirement rules of thumb exist for a reason -- to give people a general sense of how much to save and what to expect financially in the future. But that doesn't mean the 80% retirement income rule will apply to you.
Say you're in your 40s with two teenagers earning $100,000 a year. It's not a given that you'll need $80,000 a year in retirement if a good chunk of your money goes toward child-related expenses now. You may be able to get away with a $65,000 income, or even a bit less, depending on what your vision of retirement entails.
Of course, it's never a bad thing to have more savings than what you need. So if it's not too stressful to continue aggressively funding your 401(k) or IRA, then you might as well do so. You may, however, want to take some of the pressure off of yourself if you have kids, since your retirement income needs could actually be lower than expected.
