Is the 70% Income Replacement Rule Valid For Me?

One of the most common cliche's in financial planning for retirement is the 70% Income Replacement Rule in retirement.  We can add it into the cliche` category along with the 60/40 stock- bond portfolio and the 4% withdrawal rule- both heard over and over again... but are they still valid?

Obviously circumstances are different for everyone and vary widely between individuals and families.  Differences occur due to spending habits (some see retirement like every day is Saturday entailing them to daily shopping and eating out), retirement activities (who joins a golf club to golf everyday vs who wants to travel the world!), financial circumstances (who still has mortgage and car payments, or who sells their home to purchase a lower cost condo), and the most overlooked item is almost always health care costs (who is healthy and who is not!). 

So the question remains:  how much will you spend in retirement?  And how can we correctly calculate that amount without taking a microscope to all our expenses for the last couple years, which may still be far from accurate. So the best answer is for the retiree to understand their own circumstances based on the topics and utilities below and calculate how much they will need to meet their own needs.

The Cost Increases Which May Push You Over 70%

We start with working- when you're working, you are actually saving money by not spending it. Your employer may pay for ancillary items such as your phone or provide gym discounts which you will no longer be entitled to during retirement.

However, by going to work you are avoiding racking up restaurant receipts, greens fees, credit card debt from the mall, or hotel and airline charges from travelling. Those 8-10 hours a day are now complete free time for retirees to do as they please. Whereas before most workers spent heavily on the weekend and make up for it by skimping on weekdays, now every day is Saturday, which increases weekly spending.

Again, this is a generalization.  Those retirees that pass the weekends at nice restaurants, the movies, or travelling to new places will obviously tend to spend more while those who watch football and order pizza in will tend to spend less. So anticipating your future spending and activities is extremely important to how you calculate your annual spend. 

A common overlooked item is inflation.  Costs can increase noticeably in just a decade so figure in at least a 2% increase in all expenses.

Lastly, healthcare is the biggest variable.  For some this may be more expensive, for others less. If a retiree is going from a 100% paid-for private plan from your employer to medicare, he or she will be adding expense.  If you had a fairly expensive plan at work, medicare may be cheaper.

It goes without saying that either way, if you are healthy you will probably spend far less than if you are not.  Medical bills in the later stages of life can ramp up quickly. Those that die in their sleep at 88 years old after being healthy up to that point will spend less in aggregate for healthcare than a person who lives to 98 and is in and out of the hospital or has 24 hour care.

Costs That Decrease in Retirement

The main cost associated with your working years is generally housing.  If you have paid off your mortgage before retirement, you will no longer have this burden which can run as high as 20%-40% of a person's or couple's monthly expenditures.  Once the home is paid for, a lot of capital is freed that will remain invested growing and generating income. For those that have not paid off their home, a possible solution is to sell that large, expensive home and purchase a condo in a retirement community or beach community.  This will decrease your monthly nut or perhaps the home you sold has enough equity to pay for the condo outright and then some!

But housing is the easiest and the low hanging fruit in this exercise.  Other expenses that we save when not working include:  gas, tolls, clothing, lunches out (this is a maybe), and commuting costs, that will all be reduced significantly. 

Also, as people age they tend to spend less on the "going out, having fun" items. People over 80 or 85 tend to go to the movies less if at all, eat out less, and decrease overall discretionary entertainment spending in general. So remember, expenses will not be consistent over the course of retirement.


What Else???

There will always be items that are unanticipated in our calculation. Unexpected expenses such as one offs like repairs and maintenance, the purchase of a vehicle, or even a divorce should not be overlooked! Take a look at this from American Equity Investments:


Fidelity has an interesting breakdown of the different buckets for retirement spending broken out by early retirement and mid retirement:


So How Much Should I Save???

Retirement income replacement should replace 100% of spending...Period.  So if you currently spend 80% of your income and save 20% (after taxes and EVERYTHING else), then you need 80%.  But as we have seen above, just because in the last 5 years of your working life you spent $X (the 80%), most likely in the first 5 years of retirement you will spend something other than $X. 

If you search for the best method you will see many articles and sites with elaborate calculations and hypotheticals on how to calculate the dollar amount you will need in retirement. It can be overwhelming. However, barring going to a financial advisor who has access to actuarial tables and high- priced software, there are some simple calculations you can do. 

Personally, I would would advocate using either a simple excel spreadsheet or financial software to create a monthly P&L detailing your revenue and expenditures. This way you can monitor spending, where it's going, and adjust accordingly. If you start this well before retirement, you will see a pattern to your spending habits. From this it will be fairly easily to use this data to determine how much of this spending will continue in retirement.  First eliminate the expenses that disappear in retirement, then just add back the expenses that appear in retirement. One should get a fairly accurate estimate just based on this alone.   

If you want to be creative and have the time, MS Excel has many templates that can be used.
In Excel, click NEW, then search by either EXPENSE or BUDGET.  There are literally hundreds of choices.  Check a few out before settling into one.


There are many personal finance tools that can help you do this if Excel isn't your thing or you want something more robust.  Some are software to purchase that offer extremely detailed functionality while some are websites, with many being free to use.

Here is a decent list of some of the best ones I've found... I would test out a few of them as see which best suits your needs as far as functionality, ease of use, and price point: 

  • - Perennially on lists as one of the best free programs for budgeting and expense tracking. It runs as either an app or in browser, can pull in checking and credit card data, and will automatically (after some tweaking) analyze your spending.

  • Quicken - Is an extremely comprehensive tool.  This is on par with some general ledgers businesses use.  It is by far the most detailed solution available. This can be a pro or a con, as some may find it too onerous while others will be able to get extremely detailed profiles of their spending and create budgets that will greatly aid their retirement.   There are several versions ranging from $30-60 per year.  Check out their website for a comparison of them.

  • MS Money Sunset Deluxe - This replaced MS Money and is also free.  However, it has limited internet functionality compared to some of the other choices here.  

  • -  MoneyStream analyzes your spending by accessing your bank account.  Then shows you a future view of your money so you can see at glance where you stand and where you're going. 

  • Buxfer -  Buxfer helps you see all your accounts at one place, understand where your money goes, reduce unwanted spending, track investments, and save for future goals. 

  • GnuCash - Similar to Mint, it can track bank transactions, expenses, and investments, but takes a more accounting-oriented approach. It is also free.

  • You Need a Budget, YNAB - At $7 a month, it won't break the bank.  It syncs with your bank, is robust with lots of tools to help control expenses and budget for the future.

  • Buddi - Is a personal finance and budgeting program, aimed at those who have little or no financial background. It is open sourced, meaning it is easily modifiable for those that are tech savvy and its free for those that aren't.  Features include budgeting, tracking accounts, personal finance reports, but you will have to enter transactions manually (no transaction downloads).  

  • Tiller - Tiller connects your financial accounts to spreadsheets and automatically updates them with your daily transactions and balances.  This works for both Excel and Google Sheets.  This allows you to track spending, make a budget, run reports, etc.  It costs about $5 per month.

  • AceMoney Lite - This is free software download.  You can manage your budgets, track multi-currency finances, analyze your spending habits, track investments, make transfers between accounts, and do on-line banking. They bill themselves as a free alternative to MS Money and Quicken. 

  • YNAB, You Need A Budget - Like Mint, this pulls in your expenses from your bank for analysis and budgeting tracking. You can keep tabs on how you’re tracking towards your monthly budget and take action if you’re overspending. It also helps with financial literacy. 

Remember to plan!  By planning using some of the above techniques to better understand your spending habits, you can help foresee ruin before its too late.  By better organizing your retirement and using some of the aforementioned planning tools, you will better understand and anticipate any issues. Better to see an issue one or two months out and adjust spending rather than realizing it when the accounts run dry...

Now that you know more or less how much you need in retirement- the next question is:  How to produce that dollar amount!  That is where Yield Hunting comes in! 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.