Is 55% enough?

[Finance Dave]

First off, let me say "good to see everyone again", as I tend to come and go to the forum...but things are heating up so you may see more of me.

I don't follow the rules of thumb ("you'll need 80% of your pre-retirement income to maintain your lifestyle"), but I want to just check to see if I'm missing anything.

Currently 49 (birthday soon) , married, both of us work professional jobs. currently save ~30% of our gross. Everytime I do a rehirement (yes, I spelled that right) budget, I only can come up showing that I need about 55% of my pre-retirement income...no where near the numbers all these calculators and "experts" use.

(As a side note, my grandmother use to tell me "ex" means "former", and "spert" is a drip under pressure.)

I basically made a model showing all expenses in Excel, then applied "factors" to each category. The factor represents how the expense will act in rehirement. For example, if the cost will be the same (let's say property taxes), then it's 1.0. If the cost will increase 20% (let's say utilities), then it's 1.2, and so on.

Doing it this way, and adding in new expenses such as health care premiums I'll have to start paying (budgeting $500/mo/person at the moment), LTC (budgeting $225/mo/person based on quotes), increased travel (this is a biggie for us, budgeting $10k/year), I STILL only come up needing 55% of my gross pre-rehirement income.

I think there are two factors making this happen, but would like your views.

1) We are saving considerably more than the average person - 32% of our gross income

2) Taxes will decrease SUBSTANTIALLY in rehirement - we pay nearly $60k in Federal taxes each year now. Not to mention other taxes such as FICA/state.

Based on these two factors alone, it would seem we can make 32% less + an additional $60k less and live the exact same lifestyle.

So then I tried a different method. I took our current income, and started SUBTRACTING things that will decrease or go away.
Initial income minus $42k taxes minus $24k house payment (will be paid off in 2 years, about the time I rehire), minus $4k health care premiums (this is an offset to the spending above of $500/mo on health care plans), minus 6.2% FICA minus 1.45% medicare etc.

Doing it this way, I arrived at nearly the same answer...so I think I'm doing things right.

Are some of you "high savers and high earners" seeing the same phenomenon related to saving a TON on taxes and the fact that you no longer have to save for rehirement?

Thanks in advance,

Dave

 

[nun]

First off, let me say "good to see everyone again", as I tend to come and go to the forum...but things are heating up so you may see more of me.

I don't follow the rules of thumb ("you'll need 80% of your pre-retirement income to maintain your lifestyle"), but I want to just check to see if I'm missing anything.

Currently 49 (birthday soon) , married, both of us work professional jobs. currently save ~30% of our gross. Everytime I do a rehirement (yes, I spelled that right) budget, I only can come up showing that I need about 55% of my pre-retirement income...no where near the numbers all these calculators and "experts" use.

(As a side note, my grandmother use to tell me "ex" means "former", and "spert" is a drip under pressure.)

I basically made a model showing all expenses in Excel, then applied "factors" to each category. The factor represents how the expense will act in rehirement. For example, if the cost will be the same (let's say property taxes), then it's 1.0. If the cost will increase 20% (let's say utilities), then it's 1.2, and so on.

Doing it this way, and adding in new expenses such as health care premiums I'll have to start paying (budgeting $500/mo/person at the moment), LTC (budgeting $225/mo/person based on quotes), increased travel (this is a biggie for us, budgeting $10k/year), I STILL only come up needing 55% of my gross pre-rehirement income.

I think there are two factors making this happen, but would like your views.

1) We are saving considerably more than the average person - 32% of our gross income

2) Taxes will decrease SUBSTANTIALLY in rehirement - we pay nearly $60k in Federal taxes each year now. Not to mention other taxes such as FICA/state.

Based on these two factors alone, it would seem we can make 32% less + an additional $60k less and live the exact same lifestyle.

So then I tried a different method. I took our current income, and started SUBTRACTING things that will decrease or go away.
Initial income minus $42k taxes minus $24k house payment (will be paid off in 2 years, about the time I rehire), minus $4k health care premiums (this is an offset to the spending above of $500/mo on health care plans), minus 6.2% FICA minus 1.45% medicare etc.

Doing it this way, I arrived at nearly the same answer...so I think I'm doing things right.

Are some of you "high savers and high earners" seeing the same phenomenon related to saving a TON on taxes and the fact that you no longer have to save for rehirement?

Thanks in advance,

Dave

You've discovered a fact that most retirement advisers ignore; to be able to retire you need to make significantly more than your expenses so you can put the rest towards retirement savings. This simple fact means that the 80% number is stupid. Additionally in retirement many won't have to pay a mortgage, save for retirement or have such a large tax bill. Your 55% number seems sensible.....I'm planning on 30%

 

[REWahoo]

"% of pre-retirement income" is a meaningless measurement. What matters is "annual expenses in retirement" and your ability to fund those expenses from date of retirement to date of death.

 

[naggz]

We're not retired yet, but our (calculated) required gross income is under 40% of current gross wages (as long as the house is paid off).

Bare necessities would be covered by 26% of current gross income.

 

[ziggy29]

"% of pre-retirement income" is a meaningless measurement. What matters is "annual expenses in retirement" and your ability to fund those expenses from date of retirement to date of death.

Yep, but it's easier for the pop culture personal finance rags to put out one-size-fits-all recommendations (like 80%). There's no way we'd need even 60% of our current income, let alone 80%. And some people are living on such a shoestring budget that they may well need 100% or close to it.

But yes, if one wants to calculate a percentage of their current income, they should probably immediately subtract out the percentage they save for retirement and pay in payroll taxes, perhaps a little more for being in lower tax brackets and maybe with lower wardrobe expenses, transportations and less dining out -- but adding back in health care or travel expenses if you see those rising in retirement. I think it's easier to shoot for a dollar amount than a percentage, though.

 

[IBWino]

We're not retired yet, but our (calculated) required gross income is under 40% of current gross wages (as long as the house is paid off).

Bare necessities would be covered by 26% of current gross income.

Ditto. Our house will be paid off in five years, and I'm hoping to retire then when we're both 55. Assuming that we can obtain health insurance that costs no more than our current mortgage payment (~ $1500/mo.), we'll be able to live comfortably on about 40% of our current gross. We could survive on less than 30% if necessary.

 

[Finance Dave]

thanks everyone, keep the comments coming. I'm glad to see I'm not crazy. Now if we can just expand our rental efforts slightly (have one property, looking to buy a 2nd now, and hope to expand to about 5 within 3 years), then we'll have an even BETTER income during rehirement, and I can do something I enjoy...fixing up things!

The only problem is, tenants keep breaking them after I fix them.

That's ok....it goes with the territory.

 

[rescueme]

I've been retired a bit over four years, planning on spending 100% of my pre-retirement net income (eliminates all those pesky taxes and retirement contributions), while adding back in a 15% FIT rate (it's been much less) in additon to my PROI - Personal Rate of Inflation.

Even though I have no current debt (beyond monthly CC bills - paid immediately) I still projected as part of my expenses items such as home maintenance and car replacement. If I covered these ongoing expenses during my employment years, I still had to forecast the same expenses even if I did not currently have them.

My projections vs. actual have been spot on, remembering that I entered retirement debt free (actually debt-free many years before), so there were no adjustments in that area.

Taxes have been much less in retirement - not only from a standpoint of no FICA or excess unemployment tax (due to our state borrowing funds from the government), but I also pay neither state or local income tax on my retirement withdrawls or on future SS payments.

Also, health insurance (pre Medicare, provided by my former company but monthly preimum contribution is just a bit over what I had to contribute while wor*ing there, along with term insurance I had from my employer but not replaced after retirement) has not been a problem. That plan covers both DW/myself, the same as when I was still employed. The cost of both pre/post costs have been basically a wash.

I never used any % of pre-retirement gross income for any planning.

Just my story.

 

[FUEGO]

Our core spending last year (excluding the mortgage we will pay off before FIRE and work related things like childcare) was 18% of gross taxable income last year. As a result, our state, fed and payroll taxes are roughly equal to our core spending. Most of the state, fed and payroll taxes go away when we FIRE and our taxable income drops dramatically.

We plan to spend more on fun stuff like travel and entertainment, so our FIRE expenses will likely be around 25-30% of our current gross income. And we aren't particularly high income earners either compared to many on this board.

 

[GregLee]

I hadn't really noticed how much of my salary was withheld when I was working, but looking back, I see it was 30%. I still have to pay the 15% that was federal income tax, unfortunately, but 15% of my gross salary was stuff that I no longer have to pay out, now that I'm retired.

 

[scrabbler1]

Finance Dave, a lot of what you are doing is what I did in the leadup to my ER 3 years ago.

First, the percentage of pre-retirement income meant nothing to me because I reduced my work income not once but twice in the 7 years before I ERed. So 80% of X of 55% of X is meaningless to me because what the heck would "X" be when it kept going down over a 7-year period?

I created a spreadsheet which started with my last budget when I was working and adjusted it for an ER budget. The three big things which changed were:

(1) FICA taxes disappeared.

(2) Commutation expenses disappeared.

(3) Health insurance expenses increased.

However, the reduction in (1) and (2) roughtly matched the increase in (3), I found. My income taxes went down slightly, too, but mainly because of the increased deductible HI expenses.

As for the inflationary element in my budget, I did not attach an annual inflation factor to each expense. What I did do was to separate the health expenses (HI and dental costs) from the rest of the budget and attach separate inflation factors to each of the two categories.

 

[Amethyst]

When I join husband in pension-hood, I can no longer deduct TSP contributions (22500 per year) and health insurance ($3800/year, going up) so although our income will go down, our federal/state tax bite will not decline very much (I was surprised when my spreadsheet revealed this - expected taxes to drop more).

This is why we are considering moving to a state that does not tax Federal pension income.

Amethyst

 

[obgyn65]

I agree with this approach, it's the one I use. There is no way I will be able to retire early on 100% of my retirement income anyway (too high). Maybe 20-30% is more likely...

"What matters is "annual expenses in retirement" and your ability to fund those expenses from date of retirement to date of death.

 

[bikeknit]

spreadsheets

I basically made a model showing all expenses in Excel, then applied "factors" to each category. The factor represents how the expense will act in rehirement. For example, if the cost will be the same (let's say property taxes), then it's 1.0. If the cost will increase 20% (let's say utilities), then it's 1.2, and so on.

Doing it this way, and adding in new expenses such as health care premiums I'll have to start paying (budgeting $500/mo/person at the moment), LTC (budgeting $225/mo/person based on quotes), increased travel (this is a biggie for us, budgeting $10k/year), I STILL only come up needing 55% of my gross pre-rehirement income.

Dave

I've been doing the same thing with the spreadsheet and the factors. It's nice because you can play around with different assumptions. I have two columns beyond my current expenses - one for what I expect to happen with both DH and I living for quite awhile and one for if something were to happen to my husband and I'd have to make it on my own. His pension etc. are higher than what I'd have with survival benefits so I need that to know how I'd handle worse case scenario - beyond the emotional aspects of course.

The one thing I've been unsure how to calculate are expected income taxes. I don't seem to know enough about how they are calculated to estimate what ours would be in retirement. How do you all do it?

 

[chemist]

The one thing I've been unsure how to calculate are expected income taxes. I don't seem to know enough about how they are calculated to estimate what ours would be in retirement. How do you all do it?

try Taxcaster, free on TurboTax website

 

[Ken11]

FWIW- I'm two years into ER and have been coming in right on plan at about 50% of pre-retirement income.
All the reasons you bring up for the budget difference apply.
However, I also went from paying a mortgage in a high property tax state to no mortgage in a low property tax state.

 

[Chuckanut]

My Question is 80% of what? Or 55% of what? I one makes 20,000 a year, then 80% may not be enough since the income is already rather low. But, if one makes 1,000,000 a year, then 55% would still be plenty of money to have a great retirement.

 

[prototype]

Im going with 40% but I was high income (~150K). Alot of costs have disappeared. FICA/medicare, I'm no longer putting 20K into my IRA, 15 year mortgage was paid off last year, Kids finally out of college (well one has a year left but I have that covered), no spousal support (divorced). I ran all kinds of firecalc scenarious and used other calculators to confirm I should be OK (barring some kind of super hyper infllation or end of the world scenario since my pension is 45K and not inflation adjusted. Also plan to move out of high cost area (DC suburbs).

Still new here, just been reading, not posting much. Class of 2011, just turned 56, retired Jan 2011.

 

[Telly]

Running about 30% after quite a few years of ER.

 

[chris2008]

The "X% of pre-retirement income"rule is nothing more than a rule of thumb, based on the average spending habits of the average guy or on the prejudice of the so calles expert.
It can be overruled any time by knowledge of your actual and future numbers.

 

[TN_INVEST]

Yes & No

Nobody is a robot, and therefore their spending habits can/do change.

You really will have more leisure time and your health will not get better. Both of those issues can play a big role in your retirement expenses.

On the surface, I'd say you are doing a fine job of crunching the numbers.

 

[Finance Dave]

The one thing I've been unsure how to calculate are expected income taxes. I don't seem to know enough about how they are calculated to estimate what ours would be in retirement. How do you all do it?

Suggest starting with a chart like on this page.
2011 Income Tax Bracket - Marginal Tax Rate

Then you can work up approximate taxes for both income levels (pre/post) as follows.

Let's assume you make $186,000 gross and are married filing jointly...the math looks like this:

10% x 1,700 = $170
15% x (69,000 - 17,000) = 15% x 52,000 = $7,800
25% x (139,350 - 69,000) = 25% x 70,350 = $17,588
28% x (186,000-139,350) = 28% x 46,650 = $13,062
Total taxes = $38,620
In this case, your MARGINAL tax rate (the amount you pay on each additional dollar you earn) is 28%. But your AVERAGE tax rate = $38,620/186,000 = 20.8%

Now assume you rehire (I plan to take a much lower paying part-time job) and make only $40k/year.
10% x 1,700 = $170
15% x (40,000 - 17,000) = 15% x 23,000 = $3,450
Total taxes = $3,620
In this case, your MARGINAL rate is 15%, and your average rate is 9.1%

Your tax savings (I hate to call it savings...maybe call it "reduction" instead) is $38,620 - $3,620, or $35,000. So you'd remove $35,000 from your "income needs" due to lower taxation.

For us the above number is nearly $60,000 instead of $35,000....it will feel so good to get the government out of my pocketbook so heavily.

*Note the above is not perfectly accurate, as it fails to discuss AGI (Adjusted Gross Income), which is what you're really taxed on...but it's an estimate you can use. To get a little closer, simply subtract any pre-tax items (i.e. 401k pre-tax contributions) and the standard deduction from both estimates.

 

[Finance Dave]

Im going with 40% but I was high income (~150K). Alot of costs have disappeared. FICA/medicare, I'm no longer putting 20K into my IRA, 15 year mortgage was paid off last year, Kids finally out of college (well one has a year left but I have that covered), no spousal support (divorced). I ran all kinds of firecalc scenarious and used other calculators to confirm I should be OK (barring some kind of super hyper infllation or end of the world scenario since my pension is 45K and not inflation adjusted. Also plan to move out of high cost area (DC suburbs).

Still new here, just been reading, not posting much. Class of 2011, just turned 56, retired Jan 2011.

Exactly...this is similar to the situation I'm in. My big reductions are what you mentioned...fed income taxes, FICA, Medicare, no more savings in my 401k or Roth (we max those out currently), and our mortgage will be paid off in about 3 years or a little less. I usually assume 5% inflation, as I think we'll see more of it in the next 5-10 years.

 

[pb4uski]

With respect to the OP, the 80% of gross is about right in your case if it is applied to the income that you are spending. Since you are saving 30% of your gross then you are "spending" 70% of gross. 80% of 70% is 56% of gross.

That said, i fully agree with others that the 80% rule of thumb is bunk. What is more important is what you need to live on in the lifestyle that you need/desire.

 

[Finance Dave]

thanks all. I think I'm in good shape on my analysis...just fine tuning some things.