Quantifying Waiting to Retire

[Midpack]

Just thought it was a nice concise summary from a book** I am currently reading. In case you find yourself consulting someone for whom this might apply. ***

• Assuming a married couple in their early 60's earning a household income of $100,000 pretax annually.
• They'll need $66,000 a year after taxes to replace 80 percent of their preretirement income.
  
• If both retire at age 62, they would have received more than $25,000 in annual total Social Security benefits. They would need a portfolio of at least $891,000 to generate the income they wanted for their normal life expectancy.
• But if they wait until age 66, their Social Security benefits go up and the time they need to live off savings shrinks. In that case, $552,000 in savings is enough to ensure their lifestyle.
• Retire at age 70? A portfolio worth $263,000 will do it.

** Unretirement by Chris Farrell
*** The Center for Retirement Research figures fewer than half of American workers are on savings path for a comfortable retirement at age 65. But if workers wait until age 70, 86 percent should be financially secure.

 

[Senator]

Great information.

I think you need less than 80% to equal your salary. This assume you max out your 401K and pay off your mortgage prior to retirement

$100,000 salary
Less $7,650 ss/Medicare
Less $23,000 401K
Less $12,000 Mortgage Payment

Total $57,350, or 57.3%

Factor in less taxes, work expenses no longer necessary, and some additional healthcare (unless you are on medicare), and you are still less than 60%.

 

[BBQ-Nut]

But...for that scenario does it mean they would have to w*rk until 66 and 70 to reduce the needed savings?


If so...that bites!

 

[Midpack]

But...for that scenario does it mean they would have to w*rk until 66 and 70 to reduce the needed savings?


If so...that bites!

See *** above.

 

[foxfirev5]

Heck if they wait until they're 85 they'll need to save next to nothing. This must be the plan of many.

 

[timo2]

Heck if they wait until they're 85 they'll need to save next to nothing. This must be the plan of many.

I'm afraid you are right. What they might not consider is employers might not want to employ 85 yer old people.

 

[youbet]

Great information.

I think you need less than 80% to equal your salary. This assume you max out your 401K and pay off your mortgage prior to retirement

$100,000 salary
Less $7,650 ss/Medicare
Less $23,000 401K
Less $12,000 Mortgage Payment

Total $57,350, or 57.3%

Factor in less taxes, work expenses no longer necessary, and some additional healthcare (unless you are on medicare), and you are still less than 60%.

You need to be sure to emphasize that the above hypothetical numbers apply to you and to your situation alone. Every household will be different. That's why a stab in the dark (like the commonly used 80% of final income) is often used for illustrative purposes. But IMO, these numbers are just that: illustrative.

We've been enjoying a FIRE lifestyle for close to 9 years. We spend more than 100% of our final years combined income (including taxes, funding a special needs child's trust, college funding for the grandkids, etc.) So, to me the 80% looks low. In our case, it's 100%+. It's going to vary from household to household depending on how your final working income relates to your projected retirement income and whether your retirment lifestyle will substantially mimic your working lifestyle.

I understand sometimes it's hard to keep from generalizing your own particular scenario onto everyone, but it's probably best to mention when numbers apply to your own specific situation only.

 

[Texconsin]

Get out of my head!

Great information.

I think you need less than 80% to equal your salary. This assume you max out your 401K and pay off your mortgage prior to retirement

$100,000 salary
Less $7,650 ss/Medicare
Less $23,000 401K
Less $12,000 Mortgage Payment

Total $57,350, or 57.3%

Factor in less taxes, work expenses no longer necessary, and some additional healthcare (unless you are on medicare), and you are still less than 60%.

I'm visiting a neurologist this week to remove the transmitter you put in my brain! I walk 4.2 miles every night (even when I don't get home from the office until after 8 p.m.), and these numbers are too close to my nightly calculations and recalculations and recalculations of the recalculations to be a coincidence!

The only thing I'd change is that you'll still need some insurance and out-of-pocket, even with Medicare. After having to dip into my HSA for $6,500 for a couple of bridges, I've still got over $40K plus another 5+ years of $4K+ contributions (and market gains - knock on wood) before I hang up my spurs, so I won't have to spend taxable dollars from my 401(k) and then itemize only what exceeds the prevailing percent of AGI.

Good job, Senator, but what am I thinking now? You're right: don't forget to up your 2015 401(k) to $24,000!

 

[W2R]

Great information.

I think you need less than 80% to equal your salary. This assume you max out your 401K and pay off your mortgage prior to retirement

Good point. The more you set aside for retirement when working, the smaller the % needed in retirement because you get used to a certain lifestyle. Change is not always easy.

If one accidently/thoughtlessly/tactlessly complains on the board about having too much to spend and no idea what to do with it, then other forum members think you are a zillionaire when you're not. Some then respond enviously or even bitterly to your posts (don't ask me how I know this! ) Then you have to try to not mention in threads like this that your "Life of Reilly" in retirement has required less than 40% of your smallish working income.

 

[rodi]

My calcs were closer to Senator's than youbet's. My retirement budget is basically my pre-retirement gross income, minus 401k, minus medicare/SS withholding, minus after tax savings, and minus mortgage payment (lump summed the mortgage the same month I retired.) Then I added in a hefty chunk for health insurance.

We had separate funds for kids college, our huge vacation next summer (9 weeks in Europe), a car in the next few years, and some planned upgrades/maintenance in the next few years.

For us - our retirement budget (including taxes, health insurance, etc) is about 60% of our gross income prior to retirement. Our lifestyle hasn't been cut back other than the fact that we don't have to go to work. (which is a significant lifestyle adjustment - but is free.)

 

[youbet]

My calcs were closer to Senator's than youbet's. My retirement budget is basically my pre-retirement gross income, minus 401k, minus medicare/SS withholding, minus after tax savings, and minus mortgage payment (lump summed the mortgage the same month I retired.) Then I added in a hefty chunk for health insurance.

We took a different approach. We built up a ground up retirement budget that would allow us to live the modest lifestyle we choose to live. We didn't use the ending salary from our working days as a base. When we compared that ground up budget number to our projected retirement income, it fit in OK. DW's pension + my SS + conservative WR = covers it fine. If I do bother to see how our retirement budget compares to what we were earning our last few years working, it's over 100%. DW had switched to part time. MegaCorp was falling on hard times and the generous bonuses I had received for a number of years had pretty much vanished. Perhaps your situation included a relatively constant or slowly growing salary. Our income was all over the map.

We had separate funds for kids college, our huge vacation next summer (9 weeks in Europe), a car in the next few years, and some planned upgrades/maintenance in the next few years.

I include this kind of stuff (and more such as annual contributions to a trust for a special needs grandson) in my budget and not separate. If you include them, does your number get closer to mine?

For us - our retirement budget (including taxes, health insurance, etc) is about 60% of our gross income prior to retirement. Our lifestyle hasn't been cut back other than the fact that we don't have to go to work. (which is a significant lifestyle adjustment - but is free.)

I think the fact that our income dipped in our final working years and the fact that we include wealth transfers that are part of estate planning and taking care of the grand kids eduction, explain our differences pretty well.

My only disagreement, if you want to call it that, is that I'm not really in favor of using a percentage of final income as a retirement income goal. I'd rather build a budget from the ground up (to allow for lifestyle choices that may be more or less expensive than your working lifestyle - your choice).

So, rather than say "I want to live in RE like I do when working" and then removing expenses such as SS and other retirement savings, some taxes, commuting, etc., I just say "here's how I want to live in RE, let's write a ground up budget to cover it." That retirement lifestyle may be the same as, less than or more than your working lifestyle. Depends on what you want to do, how flexible you are in life, etc........

It's worked for us so far. The fact that our modest life style costs more than 100% of what we were earning the last few years we worked doesn't seem to matter. Through the first almost 9 years, things are working, we're having a ball, we fell good about taking care of family (our choice) and, knock on wood, the FIRE portfolio seems to be doing OK.

Let me ask you this. If you had done your retirement budget and it turned out to be 70% of your final working income, and your retirement income (pension + SS + WR) easily and conservatively supported that budget, would you still have FIRE'd? Or would you have continued working until that 60% goal was made?

Whether it's 100%, 80% or 60%, I just don't like the concept of planning on having a retirement income that's expressed as a percentage of your final working income.

 

[2B]

If one accidently/thoughtlessly/tactlessly complains on the board about having too much to spend and no idea what to do with it, then other forum members think you are a zillionaire when you're not. Some then respond enviously or even bitterly to your posts (don't ask me how I know this! ) Then you have to try to not mention in threads like this that your "Life of Reilly" in retirement has required less than 40% of your smallish working income.

I'm one of these. I've saved way too much but I also have a reasonably frugal lifestyle compared to the "typical" person that I work with. I'm not a zillionaire but I've definitely saved more than would have been needed to support our current lifestyle. Rather than "accidentally/thoughtlessly/tactlessly," I tend to think of myself as a morality play on what not to do if you really want to retire early. Without some discipline, it's so easy to get sucked in OMY.

I have been making a great income but we don't have his and hers Mercedes or a McMansion to support. 40% of preretirement income isn't the right number for us. It's closer to 35%.

There is no financial reason why I've postponed retirement as long as I have. The job pays great, isn't stressful and sometime its fun/interesting. It's just time to move on and figure out what I'll do all day. On Monday, 5 January, I'm turning in my resignation which will be the first day back in the office since last Thursday. I'll stay a few weeks for transition and then I'm finally, finally and finally retired.

 

[rodi]

We fund home maintenance, new car fund, vacations in our normal budget. But we are planning some big, less frequent things: Solar panels (concurrent with new roof), Electric car, charging station, etc. So even though I have a budget item for generic home maintenance, new car, etc... I have set aside EXTRA money OUT of the retirement nest egg in a separate fund - ready to spend.... That money gets topped off with the any unspent maintenance/car fund/vacation fund.

We budget $5k/year for vacations. But I have $25k set aside for the big trip next summer. We don't go to europe with the kids every year - more like every 4-5 years... In the past the Europe trips were only 3 weeks. I don't see us doing summers in Europe frequently... but reverting to our normal vacations - every 4-5 years europe for a few weeks and doing domestic (less expensive trips) in between. The $5k is based on the last 10 years worth of vacations.

And college funds- we've had 529's. We budget $6k/year/kid contributions to the college fund (on top of what's already in there) to reach the target goal when they get to college. Coincidentally, we started getting about $6k/year/kid in SS when DH started collecting SS- so consider this a wash. I don't include the income OR the savings in our budget since they net zero.

I'm not worried about the grandkids education yet. My kids are only 12 and 14. If the Bernicke model follows - we'll have excess in our budget well before the grandkids arrive.

I did a bottoms up budget as well - it was pretty close. But then again - it was based on historical spending.... so it makes sense it reached the same number as the top down.

And yes - I had pretty flat/steady income after 20 years with megacorp. It slightly declined (decline in benefits and bonuses) when the economy tanked - but my base salary stayed the same.

 

[youbet]

We fund home maintenance, new car fund, vacations in our normal budget. But we are planning some big, less frequent things: Solar panels (concurrent with new roof), Electric car, charging station, etc. So even though I have a budget item for generic home maintenance, new car, etc... I have set aside EXTRA money OUT of the retirement nest egg in a separate fund - ready to spend.... That money gets topped off with the any unspent maintenance/car fund/vacation fund.

We budget $5k/year for vacations. But I have $25k set aside for the big trip next summer. We don't go to europe with the kids every year - more like every 4-5 years... In the past the Europe trips were only 3 weeks. I don't see us doing summers in Europe frequently... but reverting to our normal vacations - every 4-5 years europe for a few weeks and doing domestic (less expensive trips) in between. The $5k is based on the last 10 years worth of vacations.

And college funds- we've had 529's. We budget $6k/year/kid contributions to the college fund (on top of what's already in there) to reach the target goal when they get to college. Coincidentally, we started getting about $6k/year/kid in SS when DH started collecting SS- so consider this a wash. I don't include the income OR the savings in our budget since they net zero.

I'm not worried about the grandkids education yet. My kids are only 12 and 14. If the Bernicke model follows - we'll have excess in our budget well before the grandkids arrive.

I did a bottoms up budget as well - it was pretty close. But then again - it was based on historical spending.... so it makes sense it reached the same number as the top down.

And yes - I had pretty flat/steady income after 20 years with megacorp. It slightly declined (decline in benefits and bonuses) when the economy tanked - but my base salary stayed the same.

Did you and DH RE at the same time? If not, what "working salary" did you use to calculate the percentage? Yours? His? Both combined?

To get the approximate 100% I came up with, I used the combined income from DW's part time work (a couple of years were near zero) and my full time, but bonus-less work, over the last 5 years until I retired at 58.

If I used peak income, and corrected for inflation, my number might be a lot closer to yours. But it doesn't seem to matter. Past income is water under the bridge and what we watch today is our spending vs our retirement income with a conservative WR. We had to take a deep breath when we continued our spending plan in 2008 and 2009 and we're certainly glad that worked out OK!

 

[Texconsin]

Theoretical percentages? Phooey!

Whether it's 100%, 80% or 60%, I just don't like the concept of planning on having a retirement income that's expressed as a percentage of your final working income.

I agree. My CEO met a man, just one year my junior who, coincidentally, has a degree from my Alma Mater. I live in a suburban home that will be paid off a few months before my earliest planned retirement date and I intend to live very modestly. My fellow UW grad lives under an I-610 bridge. The 80% rule doesn't apply to EITHER of us.

(I hope the guy worked the required 40 quarters so, in less than 3 years, he can get himself a cheap apartment...but maybe he's happy living in "Homes by Frigidaire." Can't be much worse than my Lennar.)

 

[Senator]

Good job, Senator, but what am I thinking now? You're right: don't forget to up your 2015 401(k) to $24,000!

It's in my savings budget for 2015. And so is my $4,350 for my HSA.

You need to be sure to emphasize that the above hypothetical numbers apply to you and to your situation alone. Every household will be different. That's why a stab in the dark (like the commonly used 80% of final income) is often used for illustrative purposes. But IMO, these numbers are just that: illustrative.

...it's probably best to mention when numbers apply to your own specific situation only.

My numbers were hypothetical, but you can see you need a lot less if you save early, and want to live the same without suffering a collapse in lifestyle. My actuals are higher, and the expenses I need to spend on even less. I saved almost 82% of my income this year. And most of that income will still be coming in after I leave my FT job.

If you want to live it up a bit after FIRE, you need to adjust the numbers. If you were already living it up before FIRE, you need to adjust even more. Anyone that takes any number, 50%, 80%, or 120% found on the internet as 'their number', needs to keep working.

Regardless, FICA/SS and 401K contributions go away at FIRE.

 

[Taxman59]

For my budget, I started with my net deposit into the checking account. I had direct transfer to HSA, 401k, after tax savings. In some months the balance dropped, and in some it grew, but on average it was level. I built the budget off of that, and with some items being dropped and others added, my retirement % is under 50%. The advisor from the 401k plan (free advice that was used to compare to my info), was shocked that I had that much going into savings and I hadn't lived up to my income. After the mortgage is paid off (2.875%), the percentage will drop to 40%!


Sent from my iPad using Early Retirement Forum

 

[Texconsin]

It's in my savings budget for 2015. And so is my $4,350 for my HSA.

Good for you and me, both. I can't believe people who have the money, but don't max these plans. Just because our 401(k) match is only 50% of the first 6%, there's no reason to stop there. We also get $30 per payroll ($780 per year) toward the HSA max, but a lot of folks get the regular PPO plan so they (or their kids) can go to the doctor for the smallest sniffle.

When the taxman throws you a bone, you clamp down and don't let go. Just so they don't go to means testing when I retire...but, isn't that the whole point of progressive tax rates when I'm working?

 

[rodi]

Did you and DH RE at the same time? If not, what "working salary" did you use to calculate the percentage? Yours? His? Both combined?

To get the approximate 100% I came up with, I used the combined income from DW's part time work (a couple of years were near zero) and my full time, but bonus-less work, over the last 5 years until I retired at 58.

If I used peak income, and corrected for inflation, my number might be a lot closer to yours. But it doesn't seem to matter. Past income is water under the bridge and what we watch today is our spending vs our retirement income with a conservative WR. We had to take a deep breath when we continued our spending plan in 2008 and 2009 and we're certainly glad that worked out OK!

We retired 5 months apart.
I used 2013 income.
My husband's income was hit hard during the downturn, and only partially recovered... we'd survived just fine on the lower income so I knew we had some padding in our budget.
My husband semi-unretired later in the year - but that just reduced our WR - a different source of income in retirement. We still stayed in the same budget. I'm hoping he re-retires (all the way) by Feb of next year. I am not counting on his earned income at all.

If I were already retired in 2008/2009 I probably would have cut back on our spending - but that's a temperament issue (my own fear) not a financial issue. Actually - as mentioned above - we did cut back on our spending to make sure we could still max the 401k, save for the kids college, and continue paying down our mortgage.

 

[youbet]

OK rodi, thanks.

Good luck and enjoy FIRE! You folks sound like you're really on your game!

Edit: Living through 2008/2009 being already retired was "interesting." We had some one time, fairly expensive activities planned (think of your "big trip" coming up)that we likely could not delay and reschedule. It was a "do it or cancel forever" scenario. We went ahead and spent the money and had the experiences. Thank goodness we did. Our FIRE portfolio recovered, the pictures are in the scrapbook and we don't have to look back and wish we hadn't canceled.

 

[youbet]

Anyone that takes any number, 50%, 80%, or 120% found on the internet as 'their number', needs to keep working.

There ya go! We are in full agreement. There is too much variability in what's included (or not) in both the numerator and denominator that determine those percentages that they're more than meaningless, they're dangerous.

The guy spending at a 120% of his working income level may be living more conservatively than the guy spending at 50%.

I'm all for working in absolute numbers.

I do absolutely agree with you that there are expenditures encountered while working that will go away once you are retired and they can be significant. I just handle them in absolute numbers and not in percentages related to my final income while working.

 

[lemming]

This post is so unlike Midpack. It's like one of those Sunday puzzles -find 5 things wrong with this picture.
I can't believe people are getting money for cut and paste information like this(the book author/publisher)

 

[UnrealizedPotential]

Heck if they wait until they're 85 they'll need to save next to nothing. This must be the plan of many.

Well, as I see it some people just are not good at saving money. I am not even talking about investing, just saving anything at the end of the month. Some people just can't seem to do it.

 

[Senator]

We also get $30 per payroll ($780 per year) toward the HSA max...

When the taxman throws you a bone, you clamp down and don't let go. Just so they don't go to means testing when I retire...but, isn't that the whole point of progressive tax rates when I'm working?

My company gives me I think $400 a year for HSA. And I get free VA healthcare, so I am going to use them more this year to save money.

If they ever go to means testing for SS or a 401K withdrawal, I am screwed...

 

[Midpack]

This post is so unlike Midpack. It's like one of those Sunday puzzles -find 5 things wrong with this picture.
I can't believe people are getting money for cut and paste information like this(the book author/publisher)

Wow. Obviously there are unlimited sets of assumptions, so the exact numbers aren't the point. If you want to see the numbers for a different set of assumptions, the math is not that hard.

The point was only to provide an illustration of the relative portfolios required at 62, 66 & 70 due to increased Soc Sec benefits and fewer years of retirement income. Would you dispute the portfolio required (to provide retirement income to supplement Soc Sec benefits) decreases significantly by waiting to retire at 62 vs 66 vs 70?

Again, the intent was for those members here who may be asked to (casually) advise folks who can't retire early. I know too many.