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The 70% Rule for Retirement Explained

The 70% rule for retirement savings is a useful guideline to estimate the income you may need in retirement. It suggests that you’ll require 70% of your pre-retirement, post-tax income to retire comfortably. This article will explain the 70% rule and provide tips for saving more for retirement.

Understanding the 70% Rule

The 70% rule indicates that you can estimate your future retirement spending by multiplying your post-tax income by 70%. For instance, if your current post-tax income is $72,000 per year, your estimated annual retirement spending would be around $50,400, or $4,200 per month.

Actual retirement spending varies for each individual. Factors such as debt, home ownership status, and lifestyle choices can influence this percentage. While the 70% rule is not a strict guideline, it serves as a starting point to help you assess if your retirement savings are on track.

Calculating Your Retirement Savings

To determine if you’re on track with your retirement savings, consider using age-based milestones. According to Fidelity, you should aim to have a certain amount saved by specific ages if you plan to retire by age 67. These milestones assume that 45% of your income will come from retirement savings, with the remainder supplemented by Social Security.

• Age 30: Save the equivalent of your annual salary.
• Age 35: Save twice your annual salary.
• Age 40: Save three times your annual salary.
• Age 45: Save four times your annual salary.
• Age 50: Save six times your annual salary.
• Age 55: Save seven times your annual salary.
• Age 60: Save eight times your annual salary.
• Age 67: Save ten times your annual salary.

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

These milestones are targets and may vary based on lifestyle and cost of living changes. However, having a goal 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:

• You won’t have Social Security and Medicare taxes withheld from your retirement withdrawals, which account for 7.65% of your income (or 15.3% if self-employed).
• Your income taxes will be lower in retirement due to reduced income.
• You won’t need to save for retirement once you’re retired, resulting in fewer deductions from your monthly income.
• Your spending may decrease after retirement, especially on housing, debt payments, and transportation.

Tips for Saving More for Retirement

If you want to increase your retirement savings, consider the following strategies:

Increase Your Contributions

Find out the contribution limits for your retirement accounts and increase your regular contributions if possible. Use extra money from cash gifts and bonuses to boost your savings. Automating 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. Ensure you understand the vesting period to avoid forfeiting matched contributions if you leave the company early.

Open an IRA

Consider opening an individual retirement account (IRA) to make additional tax-free or tax-deferred contributions. You can contribute up to $6,500 annually, with an extra $1,000 if you’re 50 or older. There are two main types of IRAs:

• Traditional IRA: Allows tax-deferred contributions, with taxes paid upon withdrawal in retirement.
• Roth IRA: Allows post-tax contributions and tax-free withdrawals after five years. Contribution limits may vary based on 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

Don’t Withdraw 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 may incur a 10% penalty and taxes. Avoid withdrawals before age 59½ for traditional IRAs and age 65 for 401(k)s unless they qualify for an exception.

The Bottom Line

Estimating your retirement spending can be challenging, but using the 70% rule can help set a savings goal. Don’t be discouraged if you feel behind. Consistent contributions and looking for opportunities to save more can help you build a substantial nest egg over time.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals with confidence.

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