3 Outdated Retirement “Rules” You Should Ignore

by Emily Guy Birken · 24 comments

I have a love-hate relationship with financial rules of thumb. On one hand, I recognize that not everyone is going to spend as much time thinking about and researching financial topics as they should, and rules of thumb give them easy-to-remember guidelines for staying on track. But on the other hand, these types of guidelines are often inaccurate, outdated, or outright wrong — and following them can derail the very goals you’re trying to achieve.

In particular, saving for retirement seems to be a subject that attracts these “rules.” What’s worse is that these rules will often still be stated as facts long after they’ve lost credibility.

Here are three retirement rules that no longer apply, followed by what you should be doing instead:

1. Retire with $1 million to live comfortably in your golden years

This rule of thumb has a lot going for it: $1 million makes for a nice, round number to aim for, and it sounds like plenty of money to live on.

Unfortunately, there’s also plenty wrong with this guideline. The first is the fact that $1 million isn’t quite the huge sum it once was (as Dr. Evil found out, much to his chagrin). Depending on where you live in retirement and what lifestyle you lead, you may find that $1 million won’t ensure 25 to 30 years of comfort.

And even though $1 million isn’t a huge amount of money anymore, it’s still out of reach for many Americans. According to Certified Financial Planner Mickey Cargile: “Less than 5 percent of our population has $1 million.” For the 95% who don’t, the sum is so intimidating that it makes some people give up on saving altogether.

The Better Rule: Plan on having 8x your final salary

While this rule doesn’t have an easy number to remember, it’s a much better and more personalized metric for determining what you’ll need for a comfortable retirement.

Saving 8x your ending salary is a reasonable goal for any worker. The objective is to replace 85% of your final income in retirement (see the rule of thumb below), with one year’s salary saved by age 35, three years’ salary by age 45, and five years’ salary by age 55.

2. You’ll need to replace 80% of  your final salary in retirement

This rule of thumb isn’t necessarily bad or outdated advice – it’s simply too general to truly help you figure out what your retirement income needs to be. That’s because how much you need depends entirely on your retirement activities. If you plan to travel the world in retirement, you’ll need far more income than if you plan to become the world’s foremost expert on daytime television. In addition, if your health deteriorates, you’ll need more retirement income than you would if you stay healthy as a horse in your golden years.

The Better Rule: Decide what your retirement lifestyle will be 

The original rule ignores the fact that there are many variables for every retiree – everything from the cost of living to the health needs to leisure activities. So it makes more sense to actually take the time to dream about what you want to do in retirement (which is a heck of a lot more fun than calculating what 80% of your salary is), and figure out how much that lifestyle will cost.

3. Use the 4% rule to draw on your retirement income

On the surface, this rule seems to make great sense. If you withdraw no more than 4% from your nest egg each year, you’ll protect your principal, ensuring that your money lasts your entire lifetime.

This is absolutely true – when the market is doing well. However, withdrawing 4% of your nest egg will wreak havoc on your account if the market is trending down. This will leave you in the unenviable position of either living on less that year, or taking the 4% and having it negatively affect your finances for several years.

The Better Rule: Use the bucket method to protect your nest egg while you live on it

Even if you do follow the 4% rule of thumb, it’s an excellent idea to keep some of your nest egg in longer-term investments (a long-term bucket, so to speak) that you don’t touch for the first decade or two of your retirement. Doing so allows you to have investments, say cash in an online savings account, that will ride out market volatility, while still having assets that keep growing maintaining your quality of life in tougher years.

The Bottom Line

Rules of thumb are helpful for making sure you plan for retirement, even while you’re busy living your life. It’s important, however, to remember that these guidelines aren’t going to be true for every person in every situation. Make sure you’re following the guidelines that work best for you.

Do you know of a retirement rule that should be retired? Share it in the comments below!

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  • Steveark says:

    While I did retire with 8x my last years salary invested I lived well on only 25% of my salary that year. I never spent 80% of my pay. Generally we saved 25 to 50% and still lived a six figures lifestyle. I don’t like rules based on income as much as those based on expenses but yours, as usual, are very sound.

  • fredjohnson says:

    I’ve never thought that using a percentage of your salary was a good measure of how much you need in retirement. It would seem more logical to estimate your expenses today and project them into retirement. That would be a more accurate way of measuring how much you need.

    • David @ MoneyNing.com says:

      Going with expenses is much more accurate, and the only way to have a meaningful number in my opinion. Good point Fred!

  • Tony says:

    Why would anyone really need 85% or even 80% of their final salary upon retirement? If you are saving enough to be accumulating these sort of amounts, and are paying/have paid off the mortgage, I can’t see why you would need so much in retirement.
    With lower taxes, lower savings (none) and lower propensity to spend so one gets older, unless you do 10 cruises a year in which case I recant all the above, surely something more like 50% should be sufficient for most people?

    • Bill says:

      It’s a bad idea to think that we will spend less in retirement than we do while working. This will probably be true in out later years, but recently retired people may very well find it easy to spend beyond their means. We have a lot more time to think about things to do and places to go. Quite a few people are not debt free when they enter retirement and there are always property taxes to pay. You will not live well on 50% of your pre-retirement income, trust me.

      • Tara says:

        With all the payroll taxes and savings being deducted from my paycheck, I am currently living (very comfortably) on 30% of my salary, so that is what I am aiming for in retirement. I think the rule of saving 25 x expenses is a better rule than $1 million or 8 x final salary.

        • fredjohnson says:

          You will probably have bigger medical bills in retirement than you have now. Fidelity says $250k is needed for non covered Medicare healthcare in retirement. And that’s just for starters. A nursing home stay isn’t part of that number. It’s good you can live off 30%, but that’s not good enough for me. I want to travel, still buy new cars and go out occasionally.

        • Mara says:

          wow! what an inspiration Tara!
          I an working toward similar goals! and hope to one day in the future post a similar comment 🙂

        • David @ MoneyNing.com says:

          Spending only 30% of your salary is awesome Tara. You’ll be financially independent really soon (if you aren’t already!)


          • Tara says:

            I have been obsessively paying off debt (am 100% debt free now, including the mortgage), tracking expenses and saving hard for the past 10 years – I am set to FIRE in 2017 at the age of 51. Husband is already retired and I am looking forward to joining him! 🙂

    • David @ MoneyNing.com says:

      Tara is right. Looking at expenses is a much better way of measuring how much you need for retirement. The only problem is that the majority aren’t going to spend the time to properly track their expenses, hence the shoot-at-the-hip rule of “80% of salary”.

    • steveark says:

      We’ve been retired for almost six years and I’ve found we spend exactly the same amount now that we did when I had a nine to five. And it has neither gone up nor down over the six years. Of course inflation was historically low for those years, although its happening now. We could have afforded to spend twice what we did when I was working and we still could, but we spend all we want to and just haven’t found anything else we wanted to spend on.

  • RW-in-DC says:

    I have conceptual problems with the suggestion of “8X my final salary” because if the idea is to have the individual save money beginning from their first job, they won’t have a clue of what their goal should be.

    Let me use a fairly generic example: Hired at FF restaurant @ $4.25/hour; worked 16 hours/week. Later, temporary jobs: @ $10/hr; generally worked 40 hours/week. University job: $22K/year. Next, temporary government job: $30K/year. More temp jobs @ $25/hour; 40 hr weeks. Permanent government job (after training): $55K to start; now at $80K. Still working for another twenty-thirty years or so with luck and health.

    Conceptual problem: my fast food self would not have thought about possibly making $80K/year nor that s/he should save up $640K for a retirement. This is where the “Save a Million” wins over 8x final salary since even a wage slave can understand $1,000,000 as a target while who can realistically predict a ‘final salary’?

    • David @ MoneyNing.com says:

      Good point. Sometimes I feel like these financial advisers team up in a room to come up with confusing terms and vague explanations just so they can justify their fees 🙂

      25x expenses also is a good starting point, as long as you realize that expenses need to be inflation adjusted for the year you retire!

  • Deepika says:

    Also i don’t think the rule of “saving 10% is enough” is valid anymore. The kind of changes our demands have seen in recent few years, this rule just can not be applied as generically as it used to be when the basic needs were food shelter and clothing.

  • Syed says:

    Great food for thought. It really comes down to setting goals and deciding (or trying to decide) what type of lifestyle you want to have during retirement. People who want to travel and have dinner out all the time will need more savings than someone who is content with enjoying their local scene and cooking at home. To each their own, but save accordingly.

    • David @ MoneyNing.com says:

      Those who enjoy traveling and eating out should certainly do what they feel is right for them, but they should definitely make sure they make the calculations to see just how much more time they need to work to afford those “necessities!”

  • Bill says:

    A million dollars isn’t a bad goal, but it is rare that someone can reach it by saving. It can be reached by investing, even by someone with modest means, but investing requires diligence and the ability to endure market fluctuations without panicking.

    The 80% rule is a simple thing for most of us. During retirement, we aren’t paying in to Social Security and Medicare, so we don’t need as much gross income to have the same amount of net income.

    • David @ MoneyNing.com says:

      That’s true Bill. Most people’s taxes do go down a bit after they quit their job even if they are collecting social security, as there are more tax credits for the elderly and that not all income will be active income taxed at the marginal rate.

      • RW-in-DC says:

        Tax credit/s and taxability of retirement income/pension/social security is *highly* dependent on the state you live in. Some states do not tax pensions while others tax portions and still more tax pensions at the standard rate.

        Too, Social Security can be taxable depending on your other retirement income sources. Remember to consult an honorable and educated individual about your situation and do not depend on the internet alone. 😉

        • David @ MoneyNing.com says:

          Good advice RW. Living in different states definitely puts a wrinkle in any retirement income strategy, so take time to research before making any sudden moves!

    • Tara says:

      Don’t forget Medicare has premiums – you will be spending at least $200 a month if not more on Medicare parts B, D and C or F.

  • Kate says:

    Honestly, I never think that if I would retire in the future, I need to have an 8x of my final salary. This is such a good tip! And of course, we need to adjust our lifestyle, for me as early as now, I need to adjust my lifestyle so I will have more savings whenever I want to retire.

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