Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Live Like You Make X per year
Old 07-04-2011, 04:43 PM   #1
Recycles dryer sheets
Lagniappe's Avatar
 
Join Date: Mar 2006
Posts: 207
Live Like You Make X per year

I build my retirement budget from the bottom up, based on my expenses. I thought it would be fun to figure out what my "salary" would have to be to match my planned retirement spending. I remember a chapter in Work Less Live More that showed how much less in taxes a retiree payed than someone working for W2 income.

Lots of assumptions - single, maxing out 401K, no state taxes, most income from LTCG, etc. The bottom line was at a 4% withdrawal rate, you would need 16-18 X whatever the salary was you were trying to emulate.

I don't know why, but viewing it from a different angle somehow made me feel better/ more motivated. As if, in I can get my portfolio to say $1.6 Million, I can feel like I will be getting paid $100000 per year to surf the net, hike and travel - forever.

I can't figure out how to post a table or I'd show my calcs.

Live Like = Portfolio
100K = 1.628M
150K = 2.655M
200K = 3.625M
250K = 4.539M
300K = 5.520M
__________________

__________________
Lagniappe is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-04-2011, 05:13 PM   #2
Recycles dryer sheets
OrcasIslandBound's Avatar
 
Join Date: Mar 2010
Location: Poway, CA
Posts: 441
100k/1.628M = 6.14%
150k/2.655M = 5.64%
200k/3.625M = 5.52%
Many of us would be more comfortable with about 2.5 - 3.5% withdrawal rates.
__________________

__________________
OrcasIslandBound is offline   Reply With Quote
Old 07-04-2011, 05:26 PM   #3
Thinks s/he gets paid by the post
 
Join Date: Nov 2005
Location: North of Montana
Posts: 2,753
I think the OP is suggesting that one does not "live" on his working income. Some of it goes to things like savings, work clothes, commute etc so that if you made $100K, after subtracting those expenses you lived like you made $70K. Therefore you don't need 25 X previous income, just 25 X previous spending.
__________________
There are two kinds of people in the world: those who can extrapolate conclusions from insufficient data and ..
kumquat is offline   Reply With Quote
Old 07-04-2011, 05:39 PM   #4
Recycles dryer sheets
Lagniappe's Avatar
 
Join Date: Mar 2006
Posts: 207
I am not suggesting anyone withdraw 6% of their portfolio, I am suggesting that withdrawing 4% of a 1.6M portfolio allows you to spend the same amount of money as having $100K in W2 income.

After a single filer with no dependents has contributed to your 401K, paid federal income taxes, social security, and medicare, paid for long term disability insurance, etc, they have less than $60K left to spend. Even after adding in $8K a year or so for individual health insurance and another $2.5K income taxes on capital gains and dividends, they end up needing only $65K to have the exact same lifestyle they had when they had a $100K income. At a 4% withdrawal rate, that's $1.6 Million.

I did this calculation because several posters were asking about pre-retirement income (not spending, as is the usual approach around here) and I was interested to see what portfolio vs. income-replacement might look like.
__________________
Lagniappe is offline   Reply With Quote
Old 07-04-2011, 06:48 PM   #5
Thinks s/he gets paid by the post
Jay_Gatsby's Avatar
 
Join Date: Oct 2004
Posts: 1,719
Maybe I'm missing something, but does your calculation take into account the taxes on the $65k of passive income generated by such hypothetical portfolio of $1.6 million? One would think that at least 1/3 of that $65k would still go to taxes, bringing your post-tax income down to somewhere around $43k.
__________________
He had one of those rare smiles with a quality of eternal reassurance in it . . . It faced, or seemed to face, the whole external world for an instant and then concentrated on you with an irresistible prejudice in your favor. -- The Great Gatsby, F. Scott Fitzgerald
Jay_Gatsby is offline   Reply With Quote
Old 07-04-2011, 07:17 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,626
Quote:
Originally Posted by Jay_Gatsby View Post
Maybe I'm missing something, but does your calculation take into account the taxes on the $65k of passive income generated by such hypothetical portfolio of $1.6 million? One would think that at least 1/3 of that $65k would still go to taxes, bringing your post-tax income down to somewhere around $43k.
You would probably be wrong about taxes taking up 1/3 of that $65K of passive income. First return-of-capital is tax-free. Second, for low-income folks qualified dividends and LT capital gains are currently tax-free as well. If you get Social Security benefits and your income is low enough, that's tax-free as well.

But let's go to Taxcaster and estimate taxes. With $25,000 of qualified dividends and $40,000 of LT capital gains, the taxes for a single person is estimated to be: $3255.

If some of those dividends are from foreign stock funds, then one could make use of foreign tax credit. I know that I put almost all my foreign funds in a taxable account, so that I can claim as a credit all the foreign taxes that show up on my 1099DIV. That reduces my taxes by say $900 to $1200 a year.

To generate that $40K of LT cap gains, one probably had to sell more than $40K of your funds.

Of course, that single person was early-retired and not withdrawing from traditional IRAs yet.
__________________
LOL! is offline   Reply With Quote
Old 07-04-2011, 07:26 PM   #7
Recycles dryer sheets
Lagniappe's Avatar
 
Join Date: Mar 2006
Posts: 207
Quote:
Originally Posted by Jay_Gatsby View Post
Maybe I'm missing something, but does your calculation take into account the taxes on the $65k of passive income generated by such hypothetical portfolio of $1.6 million? One would think that at least 1/3 of that $65k would still go to taxes, bringing your post-tax income down to somewhere around $43k.

It does take taxes on this into account. I assumed most of it was from long term capital gains, with a few thousand from interest and dividend income, and plugged it into turbotax. Actual tax stats for this scenario were 2K interest, 10K dividends, 52K LTCG, 8K RE taxes, 1.5K charitable deductions. I thought this was conservative, since in most years a portion of what you spend may not be a capital gain but return of principal. On this $65K of passive income, only $2.6K in federal income taxes was owed. I looked at some "What did you spend this year" threads, and that seems about right for retirees on this board in that income range. It illustrated the point for me that Bob Clyatt made in his book about taxes while working vs when retired.
__________________
Lagniappe is offline   Reply With Quote
Old 07-04-2011, 07:39 PM   #8
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by Lagniappe View Post
It does take taxes on this into account. I assumed most of it was from long term capital gains, with a few thousand from interest and dividend income, and plugged it into turbotax. Actual tax stats for this scenario were 2K interest, 10K dividends, 52K LTCG, 8K RE taxes, 1.5K charitable deductions. I thought this was conservative, since in most years a portion of what you spend may not be a capital gain but return of principal. On this $65K of passive income, only $2.6K in federal income taxes was owed. I looked at some "What did you spend this year" threads, and that seems about right for retirees on this board in that income range. It illustrated the point for me that Bob Clyatt made in his book about taxes while working vs when retired.
A couple of comments...

Are you confident that capital gains rates will stay as low as they have been ?

I suspect that most people have a collection of after-tax/401k/IRA/Roth IRA accounts. To include only after-tax accounts may not be so applicable to most of us.

Unless you need the Vulcan mind-meld to help you cope with the job, why not stick to the tried and true 25X spending/expenses to judge your nestegg size?
__________________
MasterBlaster is offline   Reply With Quote
Old 07-04-2011, 08:00 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Sep 2009
Location: Hong Kong
Posts: 1,577
Regardless of the need to adjust assumptions to reflect personal circumstances or expectations about the future (both of which are necessary for any financial planning exercise), I found it to be a useful additional sanity check on the sustainability of my retirement finances.

Thanks for posting.
__________________
Budgeting is a skill practised by people who are bad at politics.
traineeinvestor is online now   Reply With Quote
Old 07-05-2011, 07:50 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,646
This doesn't need a whole lot of analysis. OP is simply stating that he enjoys the mental exercise of imagining the "typical" earned income a worker (still in the savings/SSA stage) would have who spends what he plans to spend from his 4% SWR. It is a just a different perspective on what we all do when we complain about advisors who tell us to plan to replace 80% of our income instead of evaluating the actual expenses we need to support.
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Old 07-05-2011, 09:11 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,978
Quote:
Originally Posted by donheff View Post
This doesn't need a whole lot of analysis. OP is simply stating that he enjoys the mental exercise of imagining the "typical" earned income a worker (still in the savings/SSA stage) would have who spends what he plans to spend from his 4% SWR. It is a just a different perspective on what we all do when we complain about advisors who tell us to plan to replace 80% of our income instead of evaluating the actual expenses we need to support.
+1. Nothing is certain, the OP was illustrating a point re: taxes. It's something that typically benefits non-working retirees so a fun exercise, I didn't take it as a certainty...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 07-05-2011, 09:22 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,646
What's with the new avatar Midpack? Some kind of metamorphosis going on?
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Old 07-05-2011, 09:27 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
I understood the OP.

There is a cost to working (e.g., certain local taxes maybe, FICA, for some parking, gas, on and on), and a cost to saving for retirement (e.g., 401k, IRA, etc).
__________________
chinaco is offline   Reply With Quote
Old 07-05-2011, 09:33 AM   #14
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,613
The way I see it, if one earns $100K today but puts $25K away for retirement and spends $5K on work-related expenses (commuting, wardrobe costs, maybe the need for a second car), that household can live just as comfortably in retirement on $70K -- give or take based on differences in travel and health care costs.

And it could be even less than that, because you aren't paying the 7.65% payroll taxes (or 15.3% if self-employed!) *and* because the progressive nature of the income tax means a lower percentage of your income due in federal tax.

If nothing else this reinforces the idea that it's not really right to plan a retirement based on "percentage of current income". It's your actual expenses and how they are likely to change that matter.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 07-05-2011, 10:14 AM   #15
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,934
Quote:
Originally Posted by ziggy29 View Post
The way I see it, if one earns $100K today but puts $25K away for retirement and spends $5K on work-related expenses (commuting, wardrobe costs, maybe the need for a second car), that household can live just as comfortably in retirement on $70K -- give or take based on differences in travel and health care costs.

And it could be even less than that, because you aren't paying the 7.65% payroll taxes (or 15.3% if self-employed!) *and* because the progressive nature of the income tax means a lower percentage of your income due in federal tax.

If nothing else this reinforces the idea that it's not really right to plan a retirement based on "percentage of current income". It's your actual expenses and how they are likely to change that matter.
I definitely agree that getting a handle on expenses is an important part of retirement planning.

My salary, which was definitely less than $100K was divided as follows, with $22K going to the TSP (including over-50-catchup), and then taxes, pension, SS, medicare, and health being subtracted from the remainder:

(X-$22,000)*.68

The factor of .68 was empirically derived from looking at my paychecks in 2008-2009. Health at that time was about $4K/year, so adding that back in and assuming a $100K salary and your $5,000 work expenses, we get

($100,000 - $22,000 + $4,000)*.68 - $5,000 = $50,760 after taxes.

Now, assuming that this person also saved 25% after taxes for retirement, not an unreasonable assumption for our group,

$50,760 * .75 = $38,070 after taxes.

If this is done right, then I think an after-tax income of $38K as a retiree today (perhaps $44K before taxes) would be equivalent to a before-tax income of $100K before retiring.

At 4%, this would imply a nestegg of $1,100,000. Probably the difference in my figures from those of the OP, is in part due to assuming a different amount of saving for retirement while working.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is offline   Reply With Quote
Old 07-05-2011, 02:13 PM   #16
Recycles dryer sheets
Lagniappe's Avatar
 
Join Date: Mar 2006
Posts: 207
Quote:
Originally Posted by MasterBlaster View Post
A couple of comments...

Unless you need the Vulcan mind-meld to help you cope with the job, why not stick to the tried and true 25X spending/expenses to judge your nestegg size?
I need every ounce of creativity I can find to keep plodding through every day on the job, so exercises like this, which give a slightly different perspective on the same issue, help immensely.
__________________
Lagniappe is offline   Reply With Quote
Old 07-05-2011, 02:14 PM   #17
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,613
Quote:
Originally Posted by Lagniappe View Post
I need every ounce of creativity I can find to keep plodding through every day on the job, so exercises like this, which give a slightly different perspective on the same issue, help immensely.
I agree. I sometimes approach it like a recovering alcoholic going through AA: "one day at a time." Because if I think about having to endure many more years of this corporate garbage, a bullet to the head starts looking better and better.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 07-05-2011, 02:26 PM   #18
Recycles dryer sheets
 
Join Date: Oct 2010
Posts: 392
Thanks for posting this. I like thinking of it in this way. :-)
__________________

__________________
BellBarbara is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Independence Day: One Year Later flyfishnevada Life after FIRE 10 07-05-2011 04:03 PM
Non-Recuring Recuring expenses Rustic23 FIRE and Money 18 07-04-2011 02:32 PM
5 year countdown in Mississippi BigE Hi, I am... 11 07-01-2011 06:48 AM

 

 
All times are GMT -6. The time now is 04:35 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.