Is the 70% rule still valid for retirement?

You have certainly heard that in order to enjoy a comfortable retirement, you will need 70% of your average gross income over the last three of your working years. Does this rule of thumb still apply in 2019?

The rule of thumb

Calculation of defined benefit pension plan annuities (government employees), which are for all useful purposes life annuities: the annuity is calculated by averaging  the gross earnings of the last 3 or 5 working years multiplied by the number years of contributions to the plan, times 2%, with a maximum of 35 years. 35 times 2% = 70% is the maximum of the pension.

The 70% tends to justify the method of calculating the needed income for everyone come retirement time. But do you think someone who earns $20,000 a year can retire on $12,000 ($14,000 minus taxes)?

A family of 4 will see it’s cost of living decrease significantly come retirement time: the children will have left the nest, the house will probably be mortgage free, earning an income expense will be eliminated, less clothes to buy … But those six months in Florida …

On the other hand, a single person will not see his cost of living decrease by the same amount, but will probably have saved much more for his retirement.

If the 70% rule of thumb is dropped, what rule should we use?

A differential budget!

Establish a budget using two columns.

The left column represents the current year’s expenses. The right column, those of your first year of retirement. Some lines will be higher and some others lower.

Once this exercise is completed as honestly as possible, schedule a meeting with your financial planner. With him, you will be able to discuss subjects such as: at age 75, I will not have the same needs or the same ability to travel, what about inflation in all of this, selling of the house, my life expectancy etc…

Analysing your retirement income

During this meeting, you will tackle the stingy subject: « how much will I need to save to enjoy a comfortable retirement? »

In conclusion: « One never starts too early to save for retirement! »