How Much Money Do You Need to Retire?

A look at the “80 percent rule” in the federal context.

For many years, magazines, newspapers and other media have promoted a rule of thumb for retirement planning: To retire comfortably, you must be able to replace 80 percent of your pre-retirement income. Over my years of teaching pre-retirement classes, I’ve observed that many employees are closer to the 80 percent threshold than they think, once they add up all of their sources of retirement income.

The 80 percent figure stems from "replacement ratio" studies conducted by Aon Consulting and Georgia State University for 20 years, in which researchers cull data from the Bureau of Labor Statistics Consumer Expenditures Survey, which details how U.S. consumers, including older households, spend their money.

The study relies on gross pay, and assumes that after you retire, the withholdings for retirement from your salary will cease and you will pay less income tax on your retirement income than you paid on your salary. The withholdings that stop at retirement include:

  • Retirement itself: For employees under the Civil Service Retirement System, that amounts to 7 percent of pay. For those under the Federal Employees Retirement System, the figure is 0.8 percent for most employees.
  • Thrift Savings Plan funds: In 2013, you can contribute up to $17,500 in 2013 to your TSP account; employees 50 and older can add another $5,500 in “catch-up” contributions.
  • Social Security taxes: 6.2 percent of salary up to $113,700 in 2013, along with another 1.45 percent for Medicare.

Income tax is a little trickier. If your retirement income is less than your salary, you may be in a lower marginal tax bracket that can cause you to pay less income tax. In addition, a portion of your CSRS and FERS retirement benefit is tax-free (the part that represents your contributions). Some states don’t have an income tax or exempt some or all of retirement benefits from taxation. A portion or in some cases, all, of Social Security retirement is tax-free. Withdrawals from Roth IRAs and Roth TSP funds can be tax-free if you meet certainrequirements.

Here are some resources to help you understand retirement taxes a little better:

Comparing CSRS and FERS

Under CSRS, it’s easier to see if you’ve hit the 80 percent target, because CSRS is designed as a single benefit system -- the majority, if not all, of retirement income is in the form of a benefit that replaces a percentage of an employee’s highest three years of average salary based on years and months of service. Under FERS, it’s a little harder to figure, because FERS is a three-level system relying on a basic retirement benefit, Social Security and an employer-sponsored savings plan (the TSP).

Let’s look at a hypothetical pair of employees, each with a salary of $75,000 and 37 years of service:


  • Basic retirement benefit: 70.25 percent of high-three salary
  • TSP: $125,000 balance used to provide a payment of $7,500 per year, replacing 10 percent of the $75,000 salary
  • Social Security: Exempt
  • Total replacement: 80.25 percent


  • Basic retirement benefit: 37 percent (40.7 percent if over age 62) of high-three average salary
  • TSP: $250,000 balance used to provide a payment of $15,000 per year, replacing 20 percent of the $75,000 salary
  • Social Security: $18,000 per year, replacing 24 percent of the $75,000 salary
  • Total replacement: 81 percent

Of course, this is a highly simplified example. For every individual case, there are many moving parts that need to be explored, including age, salary rate, retirement plan, length of service, marital status, reductions to the retirement benefit for survivor elections and many more.

Overall, though, the point is that to retire comfortably, it’s important to:

  • Know how much you spend (and will spend after retirement)
  • Understand the value of your benefits: CSRS or FERS retirement, Social Security and TSP
  • Be aware of tax changes in retirement
  • Set a financial retirement goal (which may not be the magic 80 percent, by the way)
  • Re-evaluate your goal from time to time
  • Learn how to manage your money while you’re working and after you retire.