Retirement Planning 101: How Much is Enough?

Learn why the 80% rule of retirement planning may not be realistic, and how to determine your actual needs.

How much cash flow will you need in retirement? This is a core question in retirement planning—one that cuts right to the heart of your overall retirement investment strategy. It's not an easy question to actually answer.

The 80% Rule of Retirement Planning

You can never know exactly what you'll need annually in retirement. As is true of many retirement investing dilemmas, having complete certainty just isn't realistic. And that has led many in the industry to come up with rules of thumb based on your present earnings. Many claim your retirement income, from all sources, should equal 80-85% of your gross pre-retirement income which, depending on your situation, may seem like a lofty goal.

Consider: If you combine the 80% rule of thumb with another—the rule of thumb suggesting you withdraw no more than 4% of your assets annually—a person with a $100,000 pre-retirement salary would need retirement savings of $2 million.

MORE: Do you know how much your retirement will cost? Do you know how to generate the retirement income you’ll need? The Definitive Guide to Retirement Income will help you find answers to these and other important questions.

Is the 80% Rule Realistic?

Lofty? Perhaps so! Perhaps it's even excessively lofty. A recent article in The Wall Street Journal highlighted this very point, suggesting that the old rule of thumb may not be so handy after all—a point we've long argued. For one, consider: the 80% rule hinges on gross income, but most folks' tax burden changes a lot with retirement. No payroll taxes are withheld for Social Security and Medicare. You won't have employer-sponsored retirement plan contributions coming out.

Your income tax bracket could fall too, meaning that even though your gross (pre-tax) income may fall in retirement, after-tax income may not decline nearly as much. Your expenses change too! At a bare minimum, you won't have to commute, buy lunch or work clothes.

None of this is to say it's terrible to target 80% (or more!) of your salary. Oversaving is a much better problem to have than undersaving, and will help you to really spoil those grandkids rotten! But if you want a more realistic assessment of what you'll need in retirement, we've long advocated a much more detailed and nuanced approach.

Figuring Out What You'll Need in Retirement

Here is the basic framework:

1. Document your pre-retirement expenses thoroughly.

A few tips:

  • Many big banks allow you to categorize expenses online, which can be a big time saver.
  • Average out your utility bills that fluctuate throughout the year to get a clearer picture of what the expense normally looks like, not when it is skewed up or down due to higher periods of usage.
  • Identify any loans you plan to pay off.
  • Identify any services you will add, eliminate or keep.

2. Compare the results to your post-retirement sources of income.

  • Do include: Social Security, part-time employment income, pensions, etc.
  • Don't include: Withdrawals from your portfolio.

3. The gap is what you need to fill with your portfolio withdrawals.