Digging Into the 80% Rule for Income Replacement in Retirement
Consider these swing factors to create a customized income-replacement rate.
For years, the financial-services industry has drilled the "80% rule" into pre-retirees' heads, suggesting that they'll need to replace 80% of their pre-retirement income when they retire.
Other variations on setting an income-replacement ratio--simply the retiree's gross income from all sources in retirement divided by his or her pre-retirement income--come in around the same ballpark. For example, T. Rowe Price has proposed 75% as a good threshold for planning purposes. As the firm's senior financial planner Christine Fahlund discusses in this video, retirees will no longer have the "expense" of saving a portion of their income for retirement. And that factor is not insignificant: According to T. Rowe's recommendation, 15% of pre-retirees' income should be saved for retirement.