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By Christine Benz | 04-23-2010 05:55 AM

Beyond the 80% Rule

In a hard-times economy, investors need to take a fresh look at income-replacement rules, says retirement author Mark Miller.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. These days a lot of retirees are thinking about calibrating and recalibrating their retirement plans, and it's a challenging time. Here to discuss that issue with us is Mark Miller. Mark is a retirement specialist, and he's also the author of a new book called "The Hard Times Guide to Retirement Security." Mark, thank you for being here.

Mark Miller: Hi, Christine. Thanks for inviting me.

Benz: One thing I really like about your book, Mark, is that it's very holistic. You don't just discuss the investment planning aspect of retirement, but you discuss working longer, health-care costs, the whole gamut of topics. One of your main themes for this book is you need a plan, and it needs to encompass a lot of different things.

One issue you tackle is this issue of income replacement, and a lot of people have been inculcated in this 80 percent rule, that you need to be replacing 80 percent of your current income. You think you should actually take another look at that and maybe not just stick with that 80 percent rule.

Miller: Definitely. An economist that I interviewed recently on this subject referred to this, the rule of thumb "replace 80 percent of your income." He calls that the rule of dumb. I think in a hard times economy, it's appropriate to step back and look at it fresh. By which, I would say what you need to do is start by getting an accurate handle on your current budget. It's a painful exercise for a lot of us because there's a lot of detail, but really get a handle on what you're spending, then think ahead to retirement.

The problem with the 80 percent rule is your expenses could be higher or they could be lower. It depends on what you anticipate. For example, the cost of commuting goes away, or the cost of business clothing goes away.

So some things go away, but then on the other hand, you might want to travel more. Really build as best as you can a budget and get a sense of what you think you're going to need in retirement. That 80 percent rule hasn't served us well. It's also what drives a lot of the online calculators that you can use to do the what-if scenarios. It's not a great way to go.

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