One of the most important elements of planning for retirement is understanding how much you will spend when you get there. Creating a budget is not a task most people enjoy. The tedious process of going through bank and credit card statements creates an obstacle to the planning process. If only there were an "easy button" to help you figure things out. As luck would have it, there is a useful guideline. Fidelity created some general guidelines to help people begin thinking about their retirement plans. Today we look at one of them: Using the 70% Rule to easily determine your retirement spending.
0:00 - Intro
0:43 - The importance of knowing what you spend
1:49 - The math behind the 70% Rule
2:40 - How this impacts long-term planning
3:45 - A guideline that helps you keep up with life's changes
3:44 - It is also a useful diagnostic tool
6:32 - Outro
Spending is the key to success in retirement
In our experience, most of the retirees who completely deplete their retirement nest egg do so because they spend too much given the assets they have saved. Not knowing what you might spend in retirement creates many challenges when helping you build a plan. That one element points to how much you need to save, when you can retire, and what changes you might need to make.
But identifying that number can also be a challenge for many people. Nobody likes to go through their bank and credit card statements line by line to see how much they spend. It is a tedious process that often stands in the way of progress. Your spending level is also a moving target. As you progress through life, your spending habits will change, your earnings will change, and there is this pesky thing called inflation. The budget you create today will look a lot different than the one you create in 10 years.
Looking at the 70% Rule
Most people will live on their take-home pay. We don't depend on what we don't see deposited directly into our bank accounts. Things like Social Security and Medicare taxes don't apply to your retirement income (unless you're working). You won't be making your 401k contribution when you retire. And while you may have some outlays for health insurance, it may be significantly less than what you currently pay. We also see other deductions from our paychecks that you won't find when you retire.
Here are a few very simple examples. Most people are going to need to replace between 70 and 80% of their gross income in retirement. Depending on how your payroll deductions work, you may see some slightly different results.Keep in mind these figures are not adjusted for federal and state income taxes. Unless you have used the Roth IRA extensively, you are likely to pay some taxes in your retirement.
How to use this in your long-term plans...
- Calculating how much you need - Understanding how much you might spend in retirement is the first step. From there you can determine how much you need to have in savings to maintain your current lifestyle.
- This number adjusts with you - As you progress through life, things change. You may change jobs and improve your earnings. Your kids will move out on their own. You may eliminate your mortgage. This basic rule helps you easily adjust to those changes so you can adjust your plans.
- It is quick, simple, and easy - This makes getting started a lot easier. Often we find people struggle to start important conversations because they have to go through the tedious tasks of creating a budget. This allows you to start planning sooner and make meaningful adjustments.
- It is a diagnostic tool - This can easily point to some potential problems in your regular spending habits. It can be the first step to identify other problems and help point you in a good direction to fix them.
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Appearing in this video
Nikki Lude, CFP®
Nikki is a Certified Financial Planner™ Pro in Woodsfield Ohio. She has helped people plan for retirement for more than 20 years.
Neal Watson, CFP®
Neal is a Certified Financial Planner™ Pro in Marietta, Ohio. He has helped people plan for retirement for more than 28 years helping people plan for retirement.