# 70% of Income Rule is Flawed



## moneymusing (Apr 3, 2009)

http://www.marketwatch.com/story/advice-on-retirees-income-needs-is-flawed-2009-10-29

I'm not sure if I would be entirely comfortable with the idea of saving less for retirement but I do agree with the idea that everyone has their own retirement number.


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## leslie (May 25, 2009)

YOu don't need any 'study' to see this metric is garbage. Even the discussion at the link promptly ignored the '70% of income' and replaced it with '70% of spending'.

Obviously what you spend in your last year B4 retirement must be the starting point for determining what you will spend the next year. I.e. plus recreation expenses and less job expenses. 

But what you EARN B4 retirement probably has NO relationship to what you SPEND those years. You are in heavy-duty savings mode those last years.


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## OhGreatGuru (May 24, 2009)

Yes, it is flawed, mainly because of the variability of the expenditure side. If you are still paying rent, or paying a 40-year mortgage, 65-70% is not a bad rule of thumb. But most homeowners aim to retire mortgage-free, with their kids no longer financially dependent on them. If they manage this, then they don't need 70% to maintain the same life style.

It might be more accurate to say that the 70% rule is based on a statistically average wage earner, with statistically average living costs. The principle is that after retirement you no longer have to pay:
CPP, Pension or RRSP Contributions; EI; Union Dues; or other work-related deductions and costs. These, together with lowering your taxes, mean that a 70% gross pension income will net about the same net take-home pay.


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## osc (Oct 17, 2009)

My retirement planning came to the conclusion that I will need about 35% of after-tax income (if I'll be mortgage free). I rounded that to 40%. 
The percentage obviously depends on the absolute value of current income. I think that 70% is accurate for current average after-tax income of Canadian families (which I think is around $75k).


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## Saniokca (Sep 5, 2009)

moneymusing said:


> http://www.marketwatch.com/story/advice-on-retirees-income-needs-is-flawed-2009-10-29
> 
> I'm not sure if I would be entirely comfortable with the idea of saving less for retirement but I do agree with the idea that everyone has their own retirement number.


Technically it is garbage. However, for people who don't care to learn about retirement (clearly if you are on this forum you are not one of them) this is a nice number to strive for. The rules of thumb are NOT a bad idea. They are created for general public who will never bother looking into these issues. 

Example (not a great one so don't slaughter me) - Rule of thumb: eat vegetables. Now someone who doesn't know too much about nutrition will try to follow this. People who do care to investigate will tell you that lettuce is not THAT awesome for you while cabbage is. But does following at least this rule make the life of general public better? I think so.


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