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80% do not have to follow retirement rules

Image from article titled Why the 80% Retirement Rule is Bullshit

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retirement plan It can get complicated, so I’ll boil it down to a few simple rule of thumb comforting. One of her much-talked-about retirement “rules” is the “80% rule” (the exact percentage varies a bit depending on who you’re talking to). To maintain my current lifestyle.

This “rule” has many people sweating when reviewing IRAs and 401(k) plans using yet another rule of thumb. 4% secure withdrawal rules You should spend 4% of your income in your first year of retirement and adjust your withdrawals for the next few years for inflation. The idea behind this rule is that he should keep saving for 30 to 50 years and not run out of money. Many simply rely on receiving 4% of their retirement savings as income.

This is where sweat comes from. If you have $200,000 in your IRA, 4% is only $8,000. If he currently makes $50,000 a year and thinks he needs $40,000 for retirement, it’s easy to panic. But the 80% rule is, in a nutshell, bullshit.

Assumptions of the 80% Rule

First and foremost, the 80% rule is based on: many Much of it no longer applies to many. This “rule” has been around for decades, often with high commuting and professional expenses (such as proper clothing) and many of us living in High Cost of Living Areas (HCOL). is assumed to be tied to work. But in a world where working from home and business casual are increasingly the norm, that may not be the case.

This rule also makes many assumptions about your finances. For example, it usually assumes that you put money into savings at the national average rate (at the time of writing this, over 3%)-However that is you? Or are you drastically cutting your savings?Another assumption the rules make is that you are trying to maintain Exactly The same lifestyle you had when you retired — no moving or changing your spending.The rules tend to assume that mortgages will disappear, but in modern times this is actually less and less common.

In fact, retirement spending is very dynamic. Many people spend more in their early years to travel or take up new hobbies, but as they get older they typically reduce such spending. At the same time, health care costs can rise with age, so so can spending. The point is not whether your lifestyle changes or stays the same. It’s just that you can’t simply assume what it will be like.

mathematics does not check out

a Survey by Aon Consulting We found that the percentage of income required to sustain a lifestyle varies widely, favoring people with moderate incomes. requires 94% of that income to do so, and a person making $90,000 only needs 78%. Those who earn significantly more than that may need a higher percentage.

The reasoning behind this is obvious when you think about it. Low-income households save less because living expenses consume most of their income. They pay less tax. In other words, if you stop paying taxes, you will get less profit. And perhaps the most important reason about the 80% rule is that low-income people have far fewer runways to cut spending, so they can’t make too many lifestyle adjustments to compensate for their low income.

Focus on retirement funds

When that is the real key here: the 80% rule isn’t really about your income, it’s about you. SpendingAnd retirement spending is usually much more controllable than income, which is relatively fixed for most people. Or at least they are subject to market forces, which they have no direct control over moving their investments. There are many ways to adjust spending, from simply curtailing leisure activities and other extravagant activities.

It’s also a good idea to think about spending in other ways. When you retire, you can significantly reduce your spending on savings because you don’t have to put all that cash into your retirement account. Tax situations also change significantly, and there is no guarantee that your tax burden will be reduced depending on your retirement income source.

But that’s the point. There are many variables. The 80% rule is useful for sketching out a plan on the back of an envelope, but it’s really more of a guideline than a rule. His need for retirement income can be much lower or higher than his 80%, so his financial situation has to be nuanced. This doesn’t mean you shouldn’t try to save a realistic amount of money for your old age. That means you shouldn’t use arbitrary numbers to judge whether you’re on track or not.

80% do not have to follow retirement rules

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