A Closer Look at the 80% Retirement Rule

A Closer Look at the 80% Retirement Rule

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In Using Simple Rules to Predict your Retirement Needs, I passively mentioned using 80% rule to calculate retirement needs. You may have heard this rule before; here is a variation of it:

“You need 80% of your pre-retirement income during your retirement.”

A Bit of Reality

Now, that statement is just a rule of thumb and is hardly accurate. Let’s add a bit of reality to the rule:

Use Expenses Not Income

Income is not a good predictor of financial need. There are people who make much more than what they need. For instance, I doubt Bill Gate need 80% of his gazillion dollars income to retire. Alternatively, there are people who spend more than they earn — in fact, a lot of us are in this category. So, here is the revised rule:

“You need income equivalent of 80% of your pre-retirement expenses during your retirement.”

80 Percent Rule

Inflation Does Not Stop At Retirement

On average, people spend about 20 years in retirement. A lot of things change in two decades, including the cost of living. Using the rule of 72 and 3.4% average inflation rate, your cost of living will double during the course of your retirement.

Inflation double retirement need

Living Out Your Dream

80% works, if you want to maintain your standard of living and do nothing else. Sitting at home all day could be pretty boring. Many new retirees tend to live out their dreams — e.g., travel to a different country on an extended vacation, buy a little cabin in the woods, get a nice sport car, etc. In essence, post-retirement expenses could be higher than pre-retirement expenses for a few years.

New Standard of Living

80% also means that you are keeping pretty much the same standard of living. In reality, there are people who haven’t saved enough, and have to downgrade their lifestyle during retirement. On the other hand, there are people who lived modestly all their lives, saved more than enough money, and planned to reward themselves with a more luxurious retirement.

The Rising Cost of Medical Care

There is no foreseeable improvement in the rising cost of medical care in the United States. This one is going to hit every retiree hard. Many retirees spend more than their typical 80% living expenses during the few final years — i.e., assisted living facility costs, home health care costs, medical costs, etc.

Where did the 80% number come from?

The theory behind the 80% number is that there are things that will cost more during retirement and things that will cost less. Luckily, there are more things that cost less.

What Costs Less

  • You’ll probably paid off your mortgage, if not inflation probably made it feels like a lot less.
  • You’ll probably finished paying for your children educations.
  • You’ll probably pay less taxes on your income
  • Because you no longer work:
    • You’ll spend less eating out — i.e., breakfasts and lunches
    • You’ll spend less on transportation
    • You’ll spend less clothes and dry cleaning costs

What Costs More

  • You’ll continue to pay more on home maintenance costs, insurance, and property taxes throughout your retirement
  • You’ll continue to pay more on car insurance
  • Your utility bills may increase if you stay at home more
  • Medical expenses

More about 80% rule:

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Mrs. Micah

I’m going to try to live out some of my dreams before retirement (not necessarily the little cabin in the woods ones, but some of the less expensive ones) so that I don’t feel gypped when I get there. Or because I might not get there. My mom will likely make it to 65, but it’s touch and go sometimes. It’s a good thing she didn’t plan to start living then!


I think one of the misleading things about the “80% rule” or “70% rule” is the timing of the “pre-retirement income” – people like us who have young kids and mortgages will not need anywhere near 80% of our current income (adj for inflation) because if you take away the mortgage and kids cost – we don’t spend anywhere near that much now.

All these financial rules come from financial companies so you can pretty much throw them in the garbage in my opinion.

As you note, expenses are the way to calculate retirement needs.


Terry Sprouse

Health insurance is a big cost as one gets older. Many people keeping working later in life to keep their health insurance benefits. At age 66 medicare kicks in.

Investments should focus not just on saving money, but on instruments that keep generating income after one retires.


If people do dream of spending time abroad, they may actually need less than they think. The cost of living in most countries is much much lower than in North America even when living similar lifestyles.

I met one retiree recently who spends half the year in South America with his wife. The income they make from renting out their house for those six months more than covers all their living expenses for their time away and provides some savings.


I view the “80% rule” as dangerous. For the reasons you have given above it will only be the “right” number by sheer chance. It is much better to do your own calculations, allowing for inflation, changes in lifestyle and so on.


I think a lot of people forget about inflation when it comes to retirement, it’s great that you included it. This is a good look at a “rule of thumb” and it’s important to understand its reasoning and origins.


I just discovered your blog and really dig it. Thanks for all the work you put into it. I found you while looking for people who write about retirement as my client has just done a whitepaper to help CPAs tell their clients about an IRS-approved way to invest in alternative investments from their solo 401k (we call it a small business 401k). It has been around since 1974, but until now has been pretty cumbersome for even the pros. Have you seen much info on solo 401k investing in real estate or startups or what have you? I’d be… Read more »


80% retirement rule is helpful to work towards as an objective but isn’t always accurate. For example as you appraoch retirement it is likely that some of the major expenditure costs like your mortgage and significant loans will have been paid off and these often take a large chunk of any income. I suppose it depends upon the type of retirement you want.


Sorry for not posting it for you — http://www.mybusiness401k.com you’ll see a whitepaper aimed at CPAs and financial advisors, but some of the nuggets are in there for us everyday investor types. I’m doing this exact thing right now to invest in a tech startup here in Seattle. There can be criticism of this being more risky, but i’m happy to explore that in your blog and comments as i am convinced that it is less risky than other options in stocks and mutual funds. But, again, i’m big on real estate. Another site worth a look is ira123.com and… Read more »


Well, Sorry but I have to Disagree with this 80% rule.. In both my own and Dozens of others I have consulted thru our Senior Center? It’s more like 110%, not 80% of what their current bills are.. Why so much More? Ans> Human Nature.. 1. Wife wants to go Travel 2. Do more for the Kids and Grandkids 3. Goes Shopping and Has more Lunches with her Fellow retired GF’s & More Dinners with Friends 4. The Man Goes Golfing more with the Guys 5. Buys a New car..his Gold watch if you will 6. They become Winterbirds… 7.… Read more »

A Closer Look at the 80% Retirement Rule

by Pinyo time to read: 2 min