Earned Income / portfolio ratio at retirement?

[Apex1]

How much was your after tax salary as a percentage of your investable assets when you retired/plan to retire?

I'm 39, FI but not retired, and my salary increases my portfolio approximately 10-12% a year. One of my original RE goals in my early 30s was that upon retiring, my investment income could fully replace my earned income. I've recently lowered that bar My current plan is to fully retire when that percentage is closer to 7-8%. What about you?

 

[pb4uski]

I guess I don't see the relevance of the metric your looking at.

You should focus on your portfolio in relation to what you spend, not what you earn.

For example, say Joe earns $150k a year but only spends $50k and savse $100k a year. Let's also say Joe has $2m saved. If he retired his WR is only 2.5% which case most of us would say Joe is all set.

Let's say the same facts except Joe earns $300k a year, spends $50 and saves $250 and has $2m saved. Joe is still good to go.

But in one case you metric is 7.5% and in the other it is 15%. So what. It doesn't change his ability to retire.

 

[Apex1]

I guess I don't see the relevance of the metric your looking at

I get that WR is the primary criteria for one's ability to retire.

My metric is just intended to get a glimpse of one of the factors of OMY syndrome....that is, the ability to increase ones WR /safety margin for extra year worked. Somewhat related to the recent thread "when would you turn down 1 million"

In your example, joe#2 would be more inclined to stay OMY IMHO

 

[scrinch]

Take home pay is about 7% of investable assets. DW and I have just settled on TMY... two more years. No more. I'll be 57 then. We've been FI for about 5 years now.

Sent from my Nexus 7 using Tapatalk

 

[pb4uski]

About 9.3% for me, but I only worked 1/2 time that point.

 

[scrabbler1]

I did not read that you were asking for after-tax income. I used before-tax which was a hair over 4%. After-tax would be slightly under 4%. This was because I was working only 12 hours per week when I ERed. However, this was in late 2008 so my portfolio's value had begun taking a beating.

 

[rb35]

Apex1 - for me the plan is about 20%. I can relate to where you're coming from.

The way I think of it, when you walk away from a paycheck, you wonder if you're making a mistake / taking a reckless risk. If your investment income is as much as what you would've earned via a job, if becomes easier to rationalize that it's not a reckless risk. At least that's the way I think of it.

For me, it would take too long to get to the 10% zip code unless my pay gets slashed dramatically (which could happen). I settled on 20% cause I think by that point the absolute dollars would provide enough margin of safety. What I'm really trying to accomplish is making sure my investment income at retirement covers my living expenses AND grows my net worth by an amount that healthily beats inflation. As long as that's the case, I don't need it to beat inflation by as much as my w-2 income would have allowed.

The good news is, with the numbers you presented, your denominator is growing by 10% and I'm assuming your income (numerator) is roughly flat so with each passing year, your income is already growing your NW by 1% less, so whether you shoot for 8% or 10% is only a couple of years difference.

Thanks for asking this question. It's clarified in my mind a couple of things I've been thinking about for my own situation.

 

[foxfirev5]

Like others I'm not sure where this info would be helpful. My current earned income has little to do with my retirement expenses. Also pensions, however small they might be would also be a factor, unless the NPV is added to the portfolio amount.
Anyway I'm around 4%. This would fit into some studies showing one should have 25-30x their earnings saved at retirement. Still too vague for me..

 

[REWahoo]

I guess I don't see the relevance of the metric your looking at.

+1

Similar to measuring [-]the length of[/-] your net worth, the number is really meaningless when it comes to FIRE. The only important metric is the ability to fund your retirement expenses once you are no longer employed.

 

[Apex1]

The way I think of it, when you walk away from a paycheck, you wonder if you're making a mistake / taking a reckless risk. If your investment income is as much as what you would've earned via a job, if becomes easier to rationalize that it's not a reckless risk. .

This represents my sentiments exactly. Thanks for articulating it much better than I could have.

 

[FIREd]

I get that WR is the primary criteria for one's ability to retire.

My metric is just intended to get a glimpse of one of the factors of OMY syndrome....that is, the ability to increase ones WR /safety margin for extra year worked. Somewhat related to the recent thread "when would you turn down 1 million"

In your example, joe#2 would be more inclined to stay OMY IMHO

I can see the relevance of that metric (although what matters is not your after tax income, but how much of that income you actually save). If earned income stops being the main driver of portfolio growth, it is a lot easier to pull the plug. In our case, we are still at 17% net income/investable assets. So annual contributions still dwarf average portfolio returns by a good margin. And despite the fact that our portfolio is nearing 45x annual expenses and that all the calculators I have tried say we are good to go, renouncing a paycheck that still makes such a big difference on the bottom line is not so enticing.

 

[Meadbh]

I never used this metric. One metric I did use was the annual contribution I was making to savings. My net worth spreadsheet included the discrepancy between investable portfolio and my target, with a calculation of number of years to reach the target assuming constant annual savings. So, for example, if annual savings were $100K, target was $3M and current investable assets were $2.5M, the spreadsheet would estimate 5 years to go to reach the target, assuming no investment returns. (I also built in a factor for investment returns). It was nice to see the number of years to target go down over time.

 

[pb4uski]

....If your investment income is as much as what you would've earned via a job, if becomes easier to rationalize that it's not a reckless risk. At least that's the way I think of it.....

But the flip side of that coin is that you have probably worked much, much longer than you needed to if you retired when your total return (as opposed to income) is as much as what you need to live (as opposed to after-tax pay). Of course, in both cases using prudent assumptions.

This is especially true if you save a lot and/or have a high proportion of equities. Is the additional financial security worth working 5 or 10 years more than you really needed to?

Your heirs and beneficiaries will appreciate it though.

 

[REWahoo]

And despite the fact that our portfolio is nearing 45x annual expenses and that all the calculators I have tried say we are good to go, renouncing a paycheck that still makes such a big difference on the bottom line is not so enticing.

You've already won, now you're just running up the score.

 

[pb4uski]

You've already won, now you're just running up the score.

+1 if you enjoy your w*rk, then fine but if you don't it is a wasted opportunity for freedom.

 

[mickeyd]

The metric does not make much sense to me but I'm guessing that it's about 2% or so. Another victory for LBYM.

 

[Apex1]

I can see the relevance of that metric (although what matters is not your after tax income, but how much of that income you actually save)

My thinking is that savings is already accounted for in the resultant increase in portfolio. Eventually, portfolio income catches up to earned income if one delays FIRE long enough.

By the way, with the albeit small sample size so far, the majority of responses are in the 4-10% range. If one includes SS or pensions, this brings us within the range of earned income = passive income at retirement (I am assuming 5% real return on portfolio). Well, that's my very subjective interpretation at this moment but I admit I could very well be wrong.

 

[karluk]

I didn't vote. There are too many variables to come up with an answer that might be helpful to me (looking back) or others (looking ahead). Among other things, our after tax earned income was far below our living expenses. I was maxing out our tax advantaged retirement accounts and making withdrawals from taxable investments as needed to pay expenses.

I tend to agree with OP that this metric has some relevance for measuring the marginal utility of working one more year as one gets close to retirement, but I know that any number I personally came up with would be totally bogus.

 

[Looking4Ward]

Last year, my total "after tax" income represented about 8% of my invested retirement savings.

But I don't understand the significance of that.

I probably saved more than 70% of that after tax income. So my actual expenses only represented perhaps 3% of my invested retirement savings.

I'm pulling the plug at the end of next month, at which time my retirement savings will represent more than 30 years of living expenses but amounts to less than 8x my last full year's gross earnings. Yeah, I'm a tight ass. It's why I was able to save so much so quickly

So I have to agree with those who discount general rules-of-thumb like "you need 25x your annual salary" because that's not true if you were only spending 25% of it and saving the rest.

 

[Tadpole]

I don't understand the significance of the metric either. But the one vote for >20% is mine and a mistake. It should have been in the 4-6% row.