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Following the 80% Rule May Not Be Sound Retirement Planning Advice

Many retirement specialists use a rule called the 80% rule when helping clients figure out how much money they'll need to have in order to retire. It may be true - perhaps all you'll need is 75% - 85% of your current income to survive financially in retirement. Unfortunately it also may encourage you to continue to sock away too little money for your retirement.

The 80% rule is based on the idea that the expenses of retirees fall by about 25% once they retire. And some expenses do go down. You won't be commuting to work so maybe you don't need a big, expensive car, and maybe you can hang out in your pajamas all day, meaning your wardrobe needs will lessen. But there are other costs that may even rise.

When you're using a retirement calculator you'll notice that planners often assume that you will be mortgage free and living in an empty nest. Maybe that's true. On the other hand, especially if you married late or put off having children for a while, you may still have children at home, in college, returned home to live after college (finding a job can be difficult) and you may still owe plenty on your mortgage. In fact, your expenses may be rising rather than going down. You need to make your own model for your needs in retirement.

Never Assume That Your Nest Will Be Empty

If you did wait until you were in your forties to have children, you may still have a full house. And the children that left home to go to college may have returned rather than setting out on their own. You might enjoy having those kids around, but they can really jack up expenses.

You also may have taken a second mortgage on your home to pay college tuition, meaning that you won't be able to pay off your mortgage before you retire - something advised by most retirement advisors. And how can you sell your home and move to a smaller one before the kids are out?

Early retirement tends to cost more, unless you plan on doing nothing in retirement. Most early retirees are excited about having the time and the money to travel and to devote to hobbies like travel, golf, skiing, etc.

With all of those retirement years ahead, you're going to have to plan to live off the dividends that are realized from the principal of your savings, not the principal itself. It's better to assume that retirement will cost you 110% of your current salary rather than 89% of it.

Taxes are Here to Stay

Are you assuming that your taxes will go down? Don't! When you add up all of your income in retirement, you may not only end up in the same tax bracket as you were in while you were working, you might end up in a higher tax bracket! And remember that if you own your home, even if you paid off the mortgage, you still have to pay those pesky property taxes (unless you live in a state that doesn't have property tax.)

The Cost of Healthcare is Not Static

Your healthcare costs are going to go up, no matter what your health is like pre-retirement. First of all, healthcare costs have been rising and that's likely to continue. Secondly, aging causes healthcare needs and costs to rise. Living a healthy lifestyle now may help you maintain your good health but an accident or sudden illness, and especially a need for long term care could decimate your savings.

Statistics are Not Always Correct

Many statistics don't figure on inflation, or big expenses like nursing home care. This can really cost retirees who don't compute things like this into their own financial planning for retirement. Be sure to take a thorough look at your own way of life before coming up with your personal plan.

If you look at the U.S. Department of Labor Consumer Expenditure Survey, you'll see that statistics say that retirees spend less than working folk. Ty Bernicke, financial planner, says, in the Journal of Financial Planning, that for every 10 years past 55 that a retiree lives, his or her spending will decrease by about 25%.

Come Up With a Personal Plan

Every potential retiree needs to sit down and figure out what expenses they have that they will still have in retirement. Then think about any hobbies, travel, or activities you plan to take part in during retirement and figure out what they'll cost.

Long term health insurance is also a consideration. This insurance can be expensive but it's nowhere near as expensive as long term care. You should also pay off your mortgage if you can. And don't forget to take inflation into consideration.

It's entirely possible that your estimate will be close to the 80% rule. Then again, you may really need 90% of your current income in retirement. The good news is that this figure will go down as you age. Make sure, when working on your retirement plan, that you figure out the money needed to retire according to your own personal needs and wants.

About the Author:

Jason Munroe resides in Nevada with his family. He's had a passion for money since he's been a child and is now a specialist in wealth building and retirement planning. When not enjoying his money and his work he likes to travel and spend time on the Internet.