The 85% Rule is a Joke

OK. Let’s say you didn’t save anything for retirement. I’m not talking to you. So let’s say you’ve got more money than you know what to do with. I’m not talking to you either. But if you’re a baby boomer who saved something for retirement or got a modest inheritance from your Greatest Generation parents, let’s get cracking.

I’m as sure as women love chocolate that you’ve heard of┬áthe 85% rule. Everyone who calls himself a financial advisor trots that one out. You know, retirees will need 85% of pre-retirement income to support their lifestyles in retirement. Oh yeah. Some boomers will need 150% of their pre-retirement income to continue driving a Mercedes Benz to the golf course. Other boomers, misers mostly, may not need more than 10% of pre-retirement income to support their niggardly lifestyle. (Ooooooooops! I forgot about the N-word. My bad).

It all depends on spending. Financial “advisors” who are mostly idiots anyway always focus on income. That’s the wrongest way to look at it. It’s the outgo that counts most. Let’s say you put a couple of kids through college so they could get a degree in fine arts or sociology and go nowhere fast on the $150,000 it cost you plus interest. And let’s say you pay off those college loans by the time arthritis claims your knuckles. And just for good measure let’s just say that your unemployed college graduate offspring finally moved out of your house by the time you retire. And maybe, just maybe you paid off the mortgage on your hovel.

Do you think for a moment that you would go round up two more ragamuffins to put through college? Or go buy another house? Those expenditures are gone, baby! Get the picture? So you need to focus on how much you won’t be spending in retirement and what you won’t be spending it on.

Here’s a good way to figure out how much you will need for retirement. Go get your bank statements and your credit card statements. Add up how much you spend on necessaries like, I don’t know, food for instance. And utilities. And gasoline. And whatever else you spend your money on just to keep from living under a bridge. Then add in all those luxuries like two for one dinners at IHOP. Then step back and decide if you have the retirement income to support that lavishness. If so, then you’re home free!

Oh, but wait. Some new expenses just arrived with the arthritis. Now that you’re on Medicare you will need more health insurance coverage. That’s because Medicare only pays 80% of your medical bills. So you will need gap insurance. Not to fill the growing gaps in your teeth, but to pay the 20% left uncovered by Medicare. It’s called “supplemental insurance.” Oh, and let’s not forget that Medicare takes a nick from your Social Security check as well. You’re getting the idea, right?

Now let’s get a little somber and turn to the subject of “cutting back.” Not on sex. That’s a necessary and goes to the top of the list. But it’s free, mostly. No, I’m talking about cars and clothes and housekeepers and gardeners. (We used to have a maid who came in once a week to do the heavy cleaning and a yard man who mowed our lawn. But that changed when our sophisticated neighbors moved in next door. They tapped on our front door one day to ask who our “gardener” and “housekeep were. I said, “gardener”? “Yes, the gentleman who maintains your lawn.” I said, “You mean Julio? The yard man? And Kathy, our maid?” “Yes” replied our snooty neighbor. So I gave them the information they wanted, and ever since then my wife and I no longer had a yard man and a maid. We sophisticates now had a “gardener” and a “housekeeper.”)

Anyhow, do you need two cars? I mean, really. And will you be requiring all the new fashions and as much dry cleaning? Do you know how to run a lawn mower? A vacuum cleaner? Do you have to heat and cool the entire house all the time like when your children lived with you? Will the washer and dryer be used as much? Ever hear of walking to the store? You need exercise in your dotage, right?

My baby boomer brethren, what we need to do is take stock. Not Dow-Jones stock, but an inventory of wants, needs, old expenses that are gone, and new expenses to hold the grim reaper at arms length. You may find that everything is going to be all right with no changes at all if you have enough Social Security benefits and savings. Or you might find that a few cuts here and there will do the trick. Or you might find that you need to sell peanuts at the ball park in retirement. But the thing is, scout out the territory.

You need to figure out what you spend while you have a job, deduct what you won’t be paying for anymore (the kids hopefully), and expenses that you can eliminate altogether (gardener? housekeeper?), then tote up the new stuff. Then look at your potential cash flow for retirement. One size does not fit all retirement plans. And that’s why the 85% rule is a joke.

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