The 80% Rule of Retirement: Should This Rule be Retired?

An older couple from the 1950s looks at a check and smiles. The photo is in black and white.

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The 80% rule of retirement planning promises to keep you living in the manner to which you are accustomed after you've given up a paycheck. Retirement used to mean stepping away from the hustle and settling into a quieter, more predictable lifestyle. Finances were expected to follow suit, with lower spending as a hallmark of this new phase of life.

Not anymore.

People today have a very different vision for their golden years. According to an Edelman Financial Engines report, more than a third of Americans (37%) want a retirement unlike that of previous generations. Instead of slowing down, many envision a lifestyle that’s more “active/athletic” (42%) and “adventurous” (39%).

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But this shift comes with tradeoffs. An active retirement often requires higher spending, whether for travel, hobbies or pursuing long-postponed goals. Add in rising costs — everything from groceries to healthcare — and the reality of longer retirements due to increased lifespans, and the price tag can quickly climb.

That raises an important question: Are traditional retirement planning rules, like the 80% rule, still enough to meet modern needs?

What is the 80% rule of retirement?

For decades, the 80% rule has been a cornerstone of retirement planning advice. The idea is simple: You should aim to have enough savings to replace 80% of your pre-retirement income. This assumes that some expenses — like commuting, clothing and retirement contributions — will drop after you leave the workforce, making 80% sufficient to maintain your lifestyle.

This rule has been supported by solid data. For instance, Fidelity Investments analyzed national spending patterns and found that most retirees need somewhere between 55% and 80% of their pre-retirement income.

Similarly, research from J.P. Morgan Asset Management highlights a “spending curve,” where total retirement spending gradually declines over time. The chart below shows the average household spending for retired or partially-retired households with $250k-$750k investable wealth.

So, on paper, the 80% rule seems reasonable. But does it hold up in practice?

A chart showing average household spending by age for retired or partially-retired respondents.

Why the 80% rule may not be enough

The reality is that retirement spending doesn’t move in a straight line, despite what the chart above may imply. According to the J.P. Morgan study, spending varies from year to year and is far from predictable for most retirees. Some retirees experience a “retirement spending surge” during the early years when they’re eager to enjoy life and tackle their bucket lists, or at the very end of life when they require more medical care.

Daniel Forbes, CFP® Ambassador and owner of Forbes Financial Planning, explains, “Several expenditures, such as health insurance and retirement plan contributions, might go away in retirement. Other expenses, such as travel and hobbies, may increase.”

Beyond personal spending patterns, broader economic factors are straining retiree budgets. For example, health care costs continue to rise faster than general inflation. Fidelity estimates that a 65-year-old retiring today will need $165,000 for medical expenses alone. That excludes long-term care, which can add a significant burden later in life and isn’t covered by Medicare.

Brenton Harrison, CFP® Ambassador and founder of New Money New Problems, notes, “While rules of thumb like the 80% rule can be a good starting point, rising costs of food, housing and healthcare may make it difficult to significantly reduce expenses in retirement.”

Social Security uncertainty also complicates planning. A Gallup poll shows that while 58% of current retirees rely on Social Security as a major income source, only 35% of nonretirees expect it to play a significant role in their retirement. As confidence in Social Security wanes, many Americans anticipate relying more heavily on personal savings.

If that wasn’t enough, societal shifts can add to the challenge. Generation X retirement savers often find themselves sandwiched between supporting aging parents and helping adult children, creating financial pressures that derail traditional retirement plans.

“It’s hard to know with certainty how much you need to save to cover an unknown expense that may occur years from now,” Harrison adds.

Alternatives to the 80% rule

Instead of relying solely on a rule of thumb, finance experts suggest tailoring your retirement plan to your unique needs and goals.

Therefore, it may make sense to aim beyond the 80% rule by planning for 100% income replacement, which provides a cushion for rising costs or unexpected expenses. A good starting point is looking at how much you currently need to spend each month.

Forbes advises, “Review your bank statements monthly to see what’s coming in and going out. This gives you a clear picture of your household’s net deficit or surplus.”

Once you have a number, consider the “rule of $1,000.” This back-of-the-envelope calculation estimates how much you’ll need to save to generate a desired monthly income in retirement. The rule states that for every $1,000 in monthly income you want, you’ll need $240,000 saved, assuming a 5% withdrawal rate and a 5% return. For example, withdrawing 5% of $240,000 provides $12,000 annually, or $1,000 per month.

Another popular strategy is the “4% rule” (So. Many. Rules.), which suggests withdrawing 4% of your retirement savings annually, adjusted for inflation, to fund a 30-year retirement. However, this rule has also come under scrutiny. While it provides a useful guideline, some retirees may need to withdraw less, while others could safely withdraw more, especially during market upswings.

As Harrison explains, “The 4% rule may be too conservative. Retirees could be free to spend more after years of strong market performance.”

For a more tailored strategy, Harrison suggests dividing expenses into “need-to” and “want-to” categories. “Start with your ‘need-to’ living expenses — like housing and food — and then list your ‘want-to’ items, such as travel or luxury purchases,” he says. “Use your assets to build a spending plan for the essentials, even during down years. When markets are strong, buy your ‘want-to’ items — or even work part-time to fund them.”

The rule of one for retirement

Ultimately, retirement planning comes down to “the rule of one.” That is, your retirement plan should be specific to one person: YOU.

Forbes emphasizes the importance of personal planning: “We prefer to create a side-by-side comparison of a budget during working years and a projected budget during retirement.” The goal, he says, is to “save enough money to create enough after-tax income to close the gap between projected expenses and what we refer to as ‘foundational income,’ such as Social Security and pensions.”

Everyone’s costs, lifestyles and goals are different, which is why a one-size-fits-all rule like the 80% rule for retirement just may or may not be the best fit.

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