Another Reason the 8X Rule for Retirement Doesn’t Work 

Recently we wrote about the 8x Rule and why it’s a flawed calculation. Yet for many years, it has been viewed as conventional financial wisdom; and for that reason, we know it can be hard to let it go. In case you’re still in doubt, we wanted to share a question we received that further illustrates why it’s time to put the 8x Rule to rest. A client asked: 

“Does the 8x Rule include my pension? Or does it just apply to my investments?” 

To recap, the 8x Rule predicates you’ll need eight times your annual salary saved by the time you retire to live comfortably. Under this guidance, if you make $100,000 per year, you’d need $800,000 saved for retirement. But in the case of this client, they’re lucky enough to have a pension. So, while that money isn’t saved in the bank, it will still help fund their retirement. Which means it’s very much part of the equation. 

That’s precisely the crux of the issue. When you base your calculations exclusively on how much money you need to save, you overlook another important measure: how much you plan to spend. Once you know that number, you can work backwards, subtracting all potential income sources (like a pension or Social Security) to understand how much more money you’ll need. Chances are, it’s less than you think. 

Let’s put that into tangible terms. Let’s say you don’t have a pension, but you and your spouse will receive $60,000 combined in Social Security benefits annually. You’ve analyzed your current spending and anticipated you’ll spend about $70,000 per year in retirement. That means the gap you’ll need to save for is just $10,000 per year. Granted, this example is greatly simplified. But you can see the pitfall of not factoring in all your sources of income. You could be working much longer than necessary, chasing a savings number that overshoots the mark.  

This is why every Roadmap for Retirement we create includes an Income Forecast. The Income Forecast considers what you spend and factors in inflation, healthcare and travel. We project those figures 25 years into the future, including a conservative 5% return on your money. With these calculations in hand, you’ll hopefully see that not only will you still have money at the end of your retirement, but that it continues to grow even as you enjoy the life you’d envisioned. 

We know changing your mindset on the 8x Rule isn’t easy, but we’ve seen countless retirees do just that after being presented with the numbers. Ultimately, the lived experience will start to validate the shift. It may take a couple years in retirement to fully warm up to the idea that you won’t run out of money. But chances are, by the third year, you’ll finally book the trip of your dreams. Because ultimately that’s what really makes retirement rich—leaving this world with a lifetime of amazing memories, not a pile of statements showing the money you didn’t spend. 

Disclaimer: Numbers are for illustrative purposes only. Consult a professional for personalized advice.