Retirement Factor: the percentage of your pre-retirement monthly income you will need during retirement years
Financial experts suggest that we only need 80% of our pre-retirement income during retirement. That percentage is called the “Retirement Factor”. For years they have drilled that point calling it the “80% rule”. This calculation is fairly simple.
Current Monthly Income x Retirement Factor = Retirement Income Monthly Needs
$3,000 x .80 = $2,400
T. Rowe Price Group has proposed 75% as a good threshold for planning purposes. As the firm’s senior financial planner Christine Fahlund states, 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.
The fact is, any “rule of thumb,” like the 80% rule for income-replacement, is a blunt instrument–a reasonable starting point, but one that can be refined with consideration of your personal circumstances. A useful starting point, especially if you’re getting close to retirement, is to prepare an in-retirement budget. Here are some of the key swing factors to bear in mind when deciding how to set your own income-replacement rate.