The 70% Rule for Retirement: A Comprehensive Guide

Planning for retirement can be daunting, but understanding the 70% rule can simplify the process. This rule suggests that you’ll need 70% of your pre-retirement, post-tax income to maintain your lifestyle comfortably during retirement. In this blog, we’ll delve into the 70% rule, explain why it works, and offer tips to help you save more effectively for your golden years.

Understanding the 70% Rule for Retirement

The 70% rule is a guideline to estimate your future retirement spending. By multiplying your current post-tax income by 70%, you can get a rough idea of how much you’ll need annually in retirement. For instance, if your annual post-tax income is $72,000, you would need approximately $50,400 per year, or $4,200 per month, in retirement.

It’s important to note that actual retirement spending varies from person to person. Factors such as debt, home ownership status, and lifestyle choices can influence your retirement needs. Therefore, while the 70% rule is a useful starting point, it should be adjusted based on your individual circumstances.

Calculating Your Retirement Savings

To determine if you’re on track with your retirement savings, you can use age-based milestones suggested by Fidelity. These milestones assume that 45% of your retirement income will come from savings, with the rest supplemented by Social Security. Here are the recommended savings targets:

• Age 30: Save the equivalent of your annual salary. If you earn $45,000, you should have $45,000 saved.
• Age 35: Save twice your annual salary. If you earn $60,000, you should have $120,000 saved.
• Age 40: Save three times your salary.
• Age 45: Save four times your salary.
• Age 50: Save six times your salary.
• Age 55: Save seven times your salary.
• Age 60: Save eight times your salary.
• Age 67: Save ten times your salary.

For example, if you’re a 40-year-old advertising sales agent earning the median salary of $73,260, you should have $219,780 saved by now. If you get promoted to sales manager by age 50 with a salary of $150,530, your savings target would be $903,180.

These milestones are targets, not strict requirements. Your ability to meet them may vary based on lifestyle changes and cost of living. However, having these goals can help you stay on track.

Why 70%?

You might wonder why the rule suggests 70% of your post-tax income rather than 100% or another figure. Several factors contribute to this percentage:

• Tax Savings: In retirement, you won’t have Social Security and Medicare taxes withheld from your withdrawals, saving you 7.65% of your income (or 15.3% if you’re self-employed).
• Lower Income Taxes: Your income will likely be lower in retirement, resulting in lower income taxes.
• Reduced Savings Needs: You won’t need to save for retirement once you’re retired, reducing deductions from your monthly income.
• Decreased Spending: Your spending on housing, debt payments, and transportation may decrease after retirement.

Tips for Saving More for Retirement

If you want to boost your retirement savings, here are some strategies to consider:

Increase Your Contributions

Find out the contribution limits for your retirement accounts and increase your regular contributions if possible. Whenever you receive extra money, such as cash gifts or bonuses, consider putting it toward your retirement. Automating your contributions can help you stay consistent with less effort.

Take Advantage of Your Employer’s 401(k) Match

If your employer offers a 401(k) match, contribute at least enough to get the maximum match. This is essentially free money for your retirement. Be sure to understand the vesting schedule, as leaving the company before you’re fully vested could result in losing some or all of the matched contributions.

Open an IRA

An Individual Retirement Account (IRA) allows you to make tax-free or tax-deferred contributions. You can contribute up to $6,500 annually, with an additional $1,000 if you’re 50 or older. There are two main types of IRAs:

• Traditional IRA: Contributions are tax-deferred, meaning you won’t pay taxes until you withdraw the money in retirement.
• Roth IRA: Contributions are made with post-tax dollars, and withdrawals are tax-free after five years. Contribution limits may be lower based on your income and filing status.

Make Catch-Up Contributions

If you’re 50 or older, you can make additional catch-up contributions to your retirement savings. For 2023, the catch-up limits are:

• 401(k): $7,500
• IRA: $1,000
• Roth IRA: $1,000
• SIMPLE IRA: $3,500

Avoid Withdrawing Money From Your Retirement Savings

Withdrawing money from your retirement savings can hinder your progress. You’ll miss out on potential interest earnings, and early withdrawals from a traditional IRA or 401(k) incur a 10% penalty and taxes. Exceptions exist, but income taxes still apply.

The Bottom Line

Estimating your retirement spending can be challenging, but the 70% rule provides a helpful benchmark. Don’t be discouraged if you feel behind; consistent contributions and strategic savings can help you build a substantial nest egg over time.

At O1ne Mortgage, we understand the importance of financial planning for your future. If you have any questions or need assistance with your mortgage needs, don’t hesitate to call us at 213-732-3074. We’re here to help you achieve your financial goals and secure a comfortable retirement.