Do You Actually Need to Retire on 80% of Your Income?

An in-depth look at a classic retirement assumption.

There is a long-held assumption which states you need to retire on 80 percent of the income you earned during your final year of work. However, is this age-old wisdom actually good advice or simply an old wives’ tale? New research suggests that retirees may not need that much annual income to keep their standard of living. It is time to take a closer look at the 80 percent plan.

The 80 percent rule is simply a guideline. It refers to 80 percent of a retiree’s final yearly gross income, rather than net pay. The difference between gross income and wages after taxes and withholdings is quite significant.1The real financial challenge for new retirees is how to replace their paycheck, not their gross income.

Texas Tech University professor Michael Finke came to this conclusion while analyzing the 80 percent rule last year. His findings are published in Research, a magazine for financial services industry professionals. Finke noted four factors that the 80 percent rule does not account for:

  1. Retirees no longer need to direct a portion of their income into retirement accounts.
  2. Retirees do not contribute to Social Security and Medicare anymore.
  3. Most retirees do not have daily commute expenses.
  4. People often retire into a lower income tax bracket.¹

Including all these factors, Finke concluded most retirees could probably sustain their lifestyles with 77 percent of an end salary, or 60 percent of their average annual lifetime income.¹

Retirees must determine expenses that will diminish in retirement. Imagine two 60-year-old workers, both earning identical salaries at the same company. One directs 25 percent of her pay into a workplace retirement plan. The other directs just five percent. The worker allocating more of her paycheck into retirement savings needs to replace a lower percentage of her pay during retirement than the other worker. Avid savers are already used to living on less.

New retirees may not be living on less. As noted in a recent Employee Benefit Research Institute study, household spending typically declines 6 percent during the first two years of retirement, with additional declines thereafter. This is not true for all retirees; EBRI also found 46 percent of retiree households increased their spending in the initial two years of retirement. Everyone has their own retirement lifestyle.

The timeline of typical retiree spending resembles a “smile.” Investment research firm Morningstar’s 2013 study found a retiree household’s inflation-adjusted spending usually decreases at the start of retirement, bottoms out during the middle, and increases at the end.²

It’s a good idea to have a retirement budget. There will be occasional unplanned costs. Those exceptions aside, following a monthly budget may help you avoid rash, reckless spending.

Retirement income strategies should be personalized. Your strategy should be rooted in an accurate, detailed review of your income needs and available resources. This information will help you discern the level of income you will need during your future retirement.

Mike Hauser may be reached at 314-822-0344 or, or visit

This material was adapted from materials prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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