How to Make the 80% Rule Work for You

How to Make the 80% Rule Work for You

Good question - huh?  This post shares how I made the 80% rule work for me.  The key is managing three big expenses in retirement: housing, healthcare, and debt.  No easy task, but here is my approach for all three.

In a previous post, I shared the approach I used to calculate My Number (savings goal) for retirement.  I started with the 80% rule which takes your current gross income multiplied by 80% and then by 25.  This is a simple formula for calculating your retirement nest egg. 

Here is the formula: (Gross Income * .80) * 25 = Retirement Nest Egg


This seems easy - right?  Like many things, the devil is in the details.  

For me, this was a good starting point in calculating my retirement nest egg but was a little too simple for my needs.  To make this calculation more relevant, I used the Bottoms-Up Method which involves building a monthly retirement budget.  Hopefully, you have created a budget before?  If not, here is my budget template with some sample data.

There are many templates on the internet for building budgets, but I started with a spreadsheet and listed all the expenses my wife and I will have in retirement.  It included all the usual things you need like: groceries, utilities, cell phones, internet, auto insurance, home maintenance, entertainment, taxes and miscellaneous as a catch-all.  In retirement, we are moving from Southern California to Atlanta, GA so our everyday expenses will be a little less.  I assumed about 15 - 20% less.  BTW, California is a great place to live (while working) but not a great place to retire from an economics perspective.  The list of expenses seemed reasonable and achievable for my retirement plan.

You may have noticed there are some expenses not mentioned above.  I do plan to have a roof over my head, be able to go to the doctor, and keep the collections agency from calling me.  So, you need a plan for the big three (Housing, Healthcare, and Debt).  Let’s start with housing.



My wife and I currently have a mortgage, but our plan in retirement is to live mortgage free.  One of the advantages of living in California the last twelve years is the housing market overall has been a good investment.  I’ll admit, 2008 - 2010 was brutal, but things have rebounded nicely since then.  We put 20% down when we bought our house, have been paying a little extra each month to reduce our principal, and have seen some excellent growth in market value.  Also, the housing market in Georgia is more affordable than California, so we can pay cash for a nice home in Georgia once we sell our home in California.   I have to say that is very freeing!

Although simple to say and harder to do, minimizing or eliminating your housing expense in retirement is a significant advantage.  So my advice is, do everything you can to payoff your mortgage or downsize to a home you can own.  You will love how this feels every month.


Next is healthcare.  This one is very complex, and I will devote some future posts to this topic.  If you are retiring and eligible for Medicare, congratulations, you have government provided healthcare.  You will need to buy supplemental insurance to cover things Medicare doesn’t, but you have a good plan for the majority of your needs.

For me, I am not Medicare eligible.  So, I had to budget for my healthcare.  To do that, I estimated how much my company supplied healthcare cost (all-in) and put that in my budget.  I hope to find healthcare for a little less in the open market, but to be conservative, I used the approximate cost of my company plan.  You can calculate this by understanding how much you pay for company provided insurance and what percentage this represents of the total.  For example, if you pay $200 per month for healthcare at work and your portion is 25% of the cost, you take $200 divided by .25 to get the total cost of your healthcare.

Here is the Formula: Your Cost / Percentage of Total = Total Cost

If you do not know the exact percentage you are paying, ask your benefits department.  Most employers are happy to share this information since it's an employer provided benefit to you.


Last but not least is debt.  The easy answer here is to eliminate any debt you have before retiring.  This includes all the usual suspects like auto loans, student loans, credit cards, a line of credit, etc.  Having debt in retirement requires taking money from your fixed monthly income to pay principal and interest.  So, make a goal to eliminate all debt before retiring, and you will sleep a little easier at night. 

Lucky for me, my wife is a big believer in living debt free.  So, we adopted this practice many years ago.  Heading into retirement, we are debt free.  

Having a game plan for the ‘big three’ will help you plan for and successfully transition to retirement.  It may seem like a daunting task, don’t fear, I am here to help.  Build a plan, stick to it, and your days in retirement will be more enjoyable not having to worry about housing, healthcare or debt. 

I would love to hear from you, help you, and answer your questions.  

Good luck and let’s #RetireHappy!

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