One thing that’s always bothered me in my daily work is “rules of thumb”, or more specifically, relying on them to make a life-altering decision. We deal daily with people working to retire, and invariably, a potential new client approaches us with a “rule of thumb” of “80% of my income to retire.”
It always starts with needs. What will you need in retirement?
Take the following example (totally hypothetical and made up):
- $75,000 salary ($6,250 per month)
- 10-years to retirement
- 15-years left on mortgage (PITI of $1,100/mo)
- Saving 6% to a 401k
Based on that, the “take-home” (after 401k and taxes) is around $46,000 per year (I’m using a flat tax rate of 35% total to cover federal, FICA, OASDI, state), or $3,800 per month. (That equates to 61%.) Take off another $800 for the mortgage (you still have to pay property taxes and insurance), you’re now down to $3,000 per month.
What does it take to pay the bills (TV, electricity, water, etc) and buy food? $1,500 per month give or take?
So working backwards, let’s just say that you can meet the bare essentials for $2,600 per month the first few years of retirement ($1,500 bills/food and $1,100 mortgage). That’s 42% of your salary. (30% after the mortgage drops off)
That’s what you need. Plan for that first, then it doesn’t seem so bad.