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Will the 70 Percent Rule Apply to Your Retirement?By Larry FerstenouAuthor of You CAN Retire YoungA rule of thumb among financial advisors is that, when you retire, you need 70 percent or more of your pre-retirement income to maintain your lifestyle. But whether or not that rule will apply to you depends on the lifestyle you choose to live both before and during retirement. The 70 percent rule will most often apply to those who lived at or above their means during their working years and who choose to continue doing so in retirement. It will least often apply to those who have lived below their means and continue to do so in retirement. My wife and I are a good example of the latter.
Live Below Your MeansOver our 18-year careers, we averaged $47,300 per year in after-tax income. Like most people, we earned significantly less in the beginning and far more at the end of our careers. According to the 70 percent rule, and based on our income the last three years before we retired in 1993, we should have needed $53,000 in after-tax income to maintain our lifestyle. Are you kidding me? The fact is, we never spent anywhere near $53,000 any year in our lives, so why would we need that much in retirement? Here’s why the 70 percent rule didn’t apply to us and why it won’t apply to others who live below their means. The following chart summarizes our income and expenses for two periods of our married life: our leaner earning years (1976–1985) and our peak earning years (1990–1992).
During our ten leaner years, we were earning an average of $27,700 per year. Since that was after-taxes, it was discretionary income that could be spent however we wanted. Our detailed records reveal that we spent $18,000 and saved $9,700 per year on average. Needless to say, we lived below our means; we spent about 65 percent of our income and saved 35 percent. As our income grew over the years (which is true for most households) and we hit our peak earning years, how did spending change?
Earn More, Spend LessIn our three peak earning years, our income averaged $75,800 after-taxes; obviously we had a sizable amount of discretionary income. Had we lived consistent with our means, we would have spent it all ($48,100 more than during our leaner years). We could have even spent above our means and tapped out our credit cards. But you’ll notice in the chart that our expenses increased only $11,000 per year while our savings increased $37,100 per year. The fact is, we were spending only about 38 percent of our income when we could have been spending 100 percent. We increased our standard of living some, but we increased our retirement accounts far more. If you’re thinking we must have lived like paupers, you’re mistaken. We had a beautiful house in an upscale neighborhood in California, two decent cars, and pretty much everything we wanted. But then, we obviously didn’t want or need as much as many people do. The 38 percent of our income that we spent (about $29,000 per year), was plenty for us to be happy and it was sufficient for two people looking at the long term and saving for a goal of retirement at age 50. Since we had what we needed and didn’t need more, why would we need $53,000 in after-tax income to be happy when we retired in 1993? Most retirees find that their expenses decrease after they leave the workforce because they no longer have work-related expenses. In the ten years we’ve been happily retired, we’ve lived on less than $22,000 every year. We still have a nice house in a good neighborhood, a quality vehicle, and we pretty much do and have everything we want. Yet, our annual expenses over the past ten years have averaged only 26 percent of pre-retirement income. If we wanted to, we could double our expenses ($22,000 per year on travel would take us a few places) and still only be at 52 percent of our pre-retirement income. So much for the 70 percent rule.
It’s Your ChoiceWill the 70 percent rule apply to you the day you no longer want to work? Maybe ... depending on the lifestyle you choose both during and after your working years. Spend as much or more than you earn and you can count on needing at least 70 percent of your pre-retirement income. Simplify your life, adopt lower-cost hobbies and interests, and live below your means, and that rule may not be any more applicable to you than it is to us. As illustrated above, the more money you earn and the less you spend during your working years, the easier it will be to retire when the time comes that you can’t wait to leave the day-to-day grind. The 70 percent rule will apply to many, but it doesn’t have to apply to you.
Larry Ferstenou retired 11 years ago at age 42 and is the author of You CAN Retire Young: How To Retire in Your 40s or 50s Without Being Rich (American Book Business Press, 2002). More information can be found at www.youcanretireyoung.com. Copyright ã Larry A. Ferstenou, 2003–2004
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