ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

How Much Do You Need to Retire?

Updated on November 15, 2012
Conventional rules about how much money is needed for retirement can be too conservative.
Conventional rules about how much money is needed for retirement can be too conservative. | Source

The first question to ask when considering when to retire is whether you’ll be able to generate “enough” income to maintain your desired lifestyle after quitting your job.

The conventional wisdom for deciding how much income is “enough” will lead to answers which will unnecessarily delay retirement for the very people who are, in fact, in the best position to retire. In particular, the commonly accepted “rule” that a retiree needs to replace a certain percentage of his pre-retirement income (such as 80%) is likely to cause that retiree to unnecessarily delay retirement beyond the point where he could easily generate “enough” income. The problem with this rule is it focuses on replacing a percentage of pre-retirement income, rather than the more relevant goal of replacing his pre-retirement spending.

To illustrate why, consider two potential candidates for retirement: Mr. Spendthrift and Mr. Thrifty. Each man is 55 years old, and earns $60,000 per year. Each owns an identical investment portfolio of $800,000, which generates income of $32,000 per year. Thus, they each enjoy an annual income of $92,000.

Mr. Spendthrift owns a four bedroom house in an upscale neighborhood, and enjoys annual vacations to Aspen for skiing and Aruba for diving. As a result, he spends $7,000/month maintaining his lifestyle. Mr. Thrifty, on the other hand, owns a three bedroom house in a modest neighborhood, and enjoys gardening and long walks. As a result, he spends only $3,000/month maintaining his lifestyle.

A mutual friend tells Mr. Spendthrift and Mr. Thrifty he’s looking for a retiree to help run his bait shop starting next month. The work would be part-time, with earnings of $5,000 per year (10 hours per week for 50 weeks at $10 per hour). Both men love fishing, and would love to quit their full-time jobs to work at the shop.

Each man makes an appointment to visit Mr. Advisor, a financial planner, to discuss if he could retire next month. Mr. Advisor is a typical financial planner who believes a retiree needs to replace 80% of his pre-retirement income to maintain his living standard. What advice will Mr. Advisor give to Mr. Spendthrift and Mr. Thrifty? And will this advice differ?

Oddly, Mr. Advisor advises each man that he'd be making a big mistake to retire next month. Mr. Advisor started with his belief that a retiree must replace 80% of pre-retirement income to maintain his standard of living. Mr. Advisor calculated Mr. Spendthrift and Mr. Thrifty would each need to generate post-retirement income of $73,600 (80% of $92,000) to maintain his lifestyle, and this was $36,600 more than either client could expect to generate annually from his investments and bait shop work. Thus, Mr. Advisor advises each client to keep working full-time.

Mr. Advisor’s adherence to the conventional “80% rule” led him to give sound advice to his client in the worse position to retire (Mr. Spendthrift), but bad advice to his client in the better position to retire (Mr. Thrifty). To maintain his spending level after retirement, Mr. Spendthrift would need to generate $84,000 per year, but could expect to generate only $37,000 per year ($32,000 investment income plus $5,000 from the bait shop). Thus, Mr. Spendthrift would face a disastrous shortfall of $47,000 per year by retiring, so Mr. Advisor's advice was sound. In contrast, Mr. Thrifty would need to generate only $36,000 per year of retirement income to maintain his pre-retirement level of spending, and could expect to generate the same $37,000 per year after retiring next month. He would thus have a cushion of $1,000 per year! In this case, Mr. Advisor’s advice to Mr. Thrifty was too conservative.

Mr. Advisor would have given better advice by basing it not on his clients' pre-retirement incomes, but their pre-retirement spending. A better rule to follow would be a retiree needs to replace 100% of his pre-retirement spending to have “enough” income to maintain his pre-retirement standard of living. This rule may have little impact on people like Mr. Spendthrift who spend most or all of their earnings. But it would have a big impact on people like Mr. Thrifty who save much of their incomes. Mr Thrifty could take the bait shop position since he could expect to generate more than 100% of his pre-retirement spending.

If you’re more like Mr. Thrifty, consider ignoring the conventional rule focused on pre-retirement income and focus on replacing your pre-retirement spending.


This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

Show Details
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
ClickscoThis is a data management platform studying reader behavior (Privacy Policy)