Why The 70% Rule Doesn’t Make Sense

If you listen to mutual fund sales people and most of the mainstream media, you will often hear that people need to replace 70% of their income when they retire. We’ve already discussed why that number is not accurate. The point of this post is to show you exactly why saving to make up 70% of your working income is not necessary.

Let’s consider the following example.

For a family making $110,000 per year. If they want to live on the same amount of money as when they were working , they will need to save 6% of their income from ages 30 to 65. That would work out to retirement income at 50% of their working income.

If, instead they strive for 70% of their income, they would need to increase their savings from 6% of annual income to 12%, or $13,000 per year. That would mean a significant reduction in spending in their working years (roughly $7800 a year for 35 years).

So during their working and child raising years, they would have only $40,200 a year to spend, after taxes, mortgage, childcare costs instead of $47,000.

When they retire, they would have $65,000 per year to spend, after paying 15% in taxes. That represents 62% more money per year available to them for spending after retirement.

But at what cost? For 35 years, they scrimped and saved, probably not spending on meaningful experiences so they could spend more in retirement. Does this make sense to anyone? Does someone really need to boost spending by 62% at retirement. I know retirees like to travel more, but you can end up saving too much and perhaps missing out on the pleasures that money can sometimes buy.