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Salary to retirement income drop
Old 11-21-2008, 09:30 PM   #1
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Salary to retirement income drop

I know there have been 'what are your annual expenses' surveys but I am interested in people who have gone from moderate to high income levels then drop to 50% or less in retirement. Did you do it? Any problems? Things you would do different?

An example would be someone(s) earning $200k year then retire on $2m portfolio with a SWR of $80k. That is 40% of your pre-retirement income when the standard suggestion is 80% ($120k/$4m portfolio).

Heck, even earning $100k would put a $1m portfolio below the suggested amount.

I feel like I cannot save enough.....

I can see where someone from a high cost of living area sells their house for bank (maybe not anymore) and moves to a low(er) cost of living (California to Idaho). But lets say you live in an average cost of living and plan on staying there.

How do you make up the difference? Top Ramen?
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Old 11-21-2008, 09:41 PM   #2
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Quote:
Originally Posted by Ronnieboy View Post
I know there have been 'what are your annual expenses' surveys but I am interested in people who have gone from moderate to high income levels then drop to 50% or less in retirement. Did you do it? Any problems? Things you would do different?

An example would be someone(s) earning $200k year then retire on $2m portfolio with a SWR of $80k. That is 40% of your pre-retirement income when the standard suggestion is 80% ($120k/$4m portfolio).

Heck, even earning $100k would put a $1m portfolio below the suggested amount.

I feel like I cannot save enough.....

I can see where someone from a high cost of living area sells their house for bank (maybe not anymore) and moves to a low(er) cost of living (California to Idaho). But lets say you live in an average cost of living and plan on staying there.

How do you make up the difference? Top Ramen?
We are just about to try it - so I hope to see plenty of responses from others confirming it is possible.

For the last few years our gross income has been over $200K and we plan on retiring in 15 months at age 55 with a non-cola ension of $60K and a portfolio of $1M with 3% SWR.

I have tracked our expenses over the past few years and we spend about $70K /year so expect to manage just fine.
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Old 11-21-2008, 09:45 PM   #3
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We haven't FIREd yet, but our income in FIRE will be less than 25% of my working income. However, we will still have about as much income or more than our current expense/anticipated expenses, except for all the overseas travel we do...hoping DW gets the desire for that out of her system before we FIRE and move back stateside. My j*b has had me travelling internationally so much in the past 10 years that I've already had enough of the insides of airplanes and hotels.

CAVEAT: 1) tax takes nearly 50% of my working income, and we'll have little income tax in FIRE if I get my AA just right. 2) home is new and is paid off, except for prp tax and insurance...these two factors make a very big difference

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Old 11-21-2008, 09:51 PM   #4
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The difference is made up because though you're earning $200K a year, you're spending $80k a year (for example). The difference goes to accumulation, how else do you think you reach that $2m portfolio?

Ignore the recommendations as to what percentage of your pre-retirement income you need to support you in retirement. Analyze your expenses to understand how much income you need, no more and no less. Realize that if you spend all you earn, you're right, you cannot save enough.
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Old 11-21-2008, 10:27 PM   #5
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It ain't no big deal. Suppose you are a couple earning $200K and putting $41K into your 401(k)s. Your income taxes are about $30K a year. Your FICA are about $10K a year. So you quit work. Your taxes drop and you don't put money into 401(k)s and FICA. Maybe you pay $5K a year or less in taxes. So that's $41K + 10K + 25K = $76K of "expenses" you don't have anymore.

To give a personal example, I went part-time last spring and cut my salary in half. I still contributed $20,500 to my 401(k). We dropped from the 33% tax bracket to the 25% tax bracket. Also we got $2400 in tax credits that we couldn't get last year because our income was too high. I think we will be eligible for Roth IRAs. Our taxes will be half of what they were for 2007. All that means that my pay cut of 50% gross is like a pay cut of just 30%.
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Old 11-21-2008, 10:40 PM   #6
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It ain't no big deal. Suppose you are a couple earning $200K and putting $41K into your 401(k)s. Your income taxes are about $30K a year. Your FICA are about $10K a year. So you quit work. Your taxes drop and you don't put money into 401(k)s and FICA. Maybe you pay $5K a year or less in taxes. So that's $41K + 10K + 25K = $76K of "expenses" you don't have anymore. .....
This is pretty much what makes the ER #'s work for us too -
plus we plan to either downsize & pay cash for a new house or if the market is too crappy we'll just pay off what remains of the current mortgage which is costing us about (12K P&I) per year.

Insurance & Property Tax costs remain. We prefer to downsize if possible however for the lower property tax & reduced heating/cooling & misc maintenance costs.
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Old 11-21-2008, 11:05 PM   #7
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When I retired last year (4/2007) my net pension (after deductions for Fed. tax & 25% of my health insurance premium) was approximately 87.7% of my net paycheck while working. This year my net pension income (after Fed. tax & 25% of health insurance premium) will be between 91% and 92% of what my net paycheck would have been if I hadn't ER'd (that's including this year's pay increase where I used to work).

My pension went up 3% on Jan.1, 2008, and in July of this year I received an additional pension check (referred to as the "13th check") that was equal to a 4.2% increase...therefore, a 7.2% pay raise this year! (former co-workers received 2.5% this year). My pension increases next year (beginning Jan. 1, 2009 & the "13th check" in July '09) will be equal to, or slightly higher than, this year's.

With the current economic conditions, I don't think my former co-workers are going to be getting much in the way of pay raises in their upcoming contract negotiations......probably an average of 2% per year, or less. In a few years, my net pension will be equal to, or slightly greater than, what my net paycheck would have been had I continued to work instead.....without all of the hassle and b.s. of the job!

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Old 11-21-2008, 11:32 PM   #8
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....So you quit work. Your taxes drop and you don't put money into 401(k)s and FICA.....
Exactly! When I ER'd I quit paying into the pension plan, SS, state income tax (there's no state income tax on my gubmint pension), union dues, etc. When working, I used to pay 20% of my health insurance premiums.....I kept the insurance and pay 25% of the premium. Though I no longer belong to my former Union Local, I'm still active in the Union's Retiree Chapter.....I now pay dues on a yearly basis that are approximately 8-9% of what I paid while working. (The Retiree's Chapter fights and lobbies for retiree's & senior's benefits and well-being.)

So a lot of the stuff that was deducted from my paycheck while working, is not deducted, or paid for from, my pension check. All of those deductions sure ate away a big chunk of change from the old paycheck. So with those gone now, that brings the net income from my pension up within spittin' distance of the net pay at the old job. I can live with that!
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Old 11-21-2008, 11:38 PM   #9
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Two years before I pulled the plug we went in to retirement mode to test the waters. I was plunking 50% of my check in to the 401K and IRA's. The other 50% was used for all taxes, medical and living expenses.

So far in retirement we are living on my pension and DW's SS check, which is about 51% of my last paycheck. Still to come is my SS and the nest egg earnings, both are growing everyday. Add it all up and I'm about 110% of my last paycheck.

Got to go polish the egg now.
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Old 11-21-2008, 11:50 PM   #10
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If your income has varied significantly over your lifetime (mine sure did), you shouldn't have too much of a problem understanding what it will mean to live on less than you're making at career's end when you RE.

Our retirement income is currently about 60% of what DW and my combinined incomes were in the last few years before retirement. Like the folks who've already posted, we now don't contribute to SS, 401k, 403b, IRA, etc. Health Insurance went up along with travel. Some other expenses went down. And, most importantly, because we spent years of our working lives living on the level of income we have right now, we were quite prepared to make the required budget adjustments. We'd already been there and done that during the course of our working years.

I can understand for someone who has made approxiamtely the same level of income (inflation adjusted) for many years, it might be a little more difficult to visualize living at a different, probably lower, income level. In that case, it's called doing a budget, understanding it and executing it......
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Old 11-22-2008, 12:25 AM   #11
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The real biggie that is within your control is housing cost. If you are paid off on the mtg close to the time you retire (or a few years early) that is a huge item. Also, you can be more selective on the food budget i.e. no more of let's go out I'm too tired to cook etc. It is less expensive to cook real food that tastes better and is better for you than paying more for convenience. At least in this womans mind!
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Old 11-22-2008, 01:35 AM   #12
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The real biggie that is within your control is housing cost. If you are paid off on the mtg close to the time you retire (or a few years early) that is a huge item.
While my house was paid off when I RE'd, I don't look at that as being a "biggie" advantage going into retirement. Money spent paying off the house is money that could be in a CD earning interest. Depending on the relationship between interest earned from the CD and interest paid on the mortgage, you may or may not have a "biggie" advantage in having the house paid off. I prefer to have the house paid for but haven't considered it to be a big financial advantage in retirement.
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Old 11-22-2008, 03:51 AM   #13
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We are getting there by years of saving, investing and LBYM.

We have a pretty good income right now (my wages and bonuses). My target income for ER is my current wages. We had an even higher income when DW was working. She is ERd now.

We never spent all of our income. We have lived on less than we earn. Even after DW retired... we do not spend all of my income.

Plus, I intend to have our house paid off when I retire (ER). This will further reduce our spend.

Our current expenses (minus what we save and the mortgage) is less than my current income (almost half).

Basically my target income is 2x of what we actually spend today. Mainly because we intend to travel a bit more. That 2x provides alot of cushion.

Of course, our portfolio just shrunk by about 30% (mainly stock paper loses). So if things do not recover in the next few years... my actual ER income may be more like 1x to 1.5x of our current expenses. (at a 4% SWR).

I have a pension coming... but if I ER is will be reduced. It would be about 30% (pre-tax) of our current expenses...

I am fairly sure I can stay on target for ER without compromising our current lifestyle. Mainly because I am holding a fair amount of bonds. But I am feeling a little less certain these days.
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Old 11-22-2008, 04:16 AM   #14
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That is 40% of your pre-retirement income when the standard suggestion is 80% ($120k/$4m portfolio).
How do you make up the difference? Top Ramen?
That 80% "standard suggestion" is a sound bite for the media and the financial analysts advisors. It's based on a 1980s study that determined work-related expenses make up about 20% of income. It has nothing to do with anyone's reality except by coincidence.

When spouse and I were both working, near the end of our careers we brought home over five times the amount we spent. Of course we were working, not spending. For our ER we put together a trial budget and tweaked it as we went along. Six years later it doesn't need much tweaking.

As others have mentioned, keep in mind that if you're earning $200K/year now then the first thing that's going to happen in ER is that your taxes are going to drop almost off the radar. You'll also stop putting money away in savings (unless you feel the need to save) and you may even have paid off your mortgage.

We still eat Top Ramen when we're too lazy to cook a full meal...
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Old 11-22-2008, 05:44 AM   #15
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There are a lot of things that you spend money on while you are working that you wont' spend when you are retired, like fancy clothes (fi you work in an office and such), eating out as much, driving to work and back every day, etc.
On the other hand reduction of those expenses can be offset by new expenditures such as hobbies, travel, etc. But those things can be done cheaply if you are savvy.
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Old 11-22-2008, 05:50 AM   #16
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My current COLA'd Retirement (in Jan 09) we be over 3 times the amount it was when I retired. At that time it was 52.5% of my "Gross Base Pay". Ad back, the 7.65% SS/MC, which is not paid on Retirement, and it was about 55%. Along with Medical Insurance being either inexpensive ($460 per year for both) and now only the Medicare Part B (which is about $189 a month) we could live on that (including all expenses). Home paid for (market value $344K and 4 year old paid for vehicle (only need one)). Frankly, I would not bank on taxes being lower in the long run - about 20% of our current gross income goes to taxes (Federal Income, RE (the big one), and a small state payment).
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Old 11-22-2008, 05:57 AM   #17
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Anyone without a huge pension on the horizon who isn't putting aside a substantial chunk of their pay for retirement? I think it would be unrealistic to spend one's entire salary in these days of self-funded retirements and 401K's.

The income upon which I am taxed is several times what I have available to spend. The rest goes to taxes, SS, and my retirement nestegg.

When I retire next year, the income upon which I will be taxed will be far less. But the money available for me to spend will be more.

I would think most people here are aware that spending every cent of one's salary is insane (at least, for most of us).
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Old 11-22-2008, 09:54 AM   #18
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Last year working approximately $165,000 gross income for DW and I. We currently live on approximately $48,000 including all taxes. Our spreadsheets indicate we need about $55,000 a year, however, that includes sinking funds to replace things like cars, appliances and such.

We lived in Houston, moved to a lake home. New home is actually bigger and cost twice as much as our pre-retirement home, however mortgage payment is only slightly higher. (due to taxes)

It all depends on weather you live below, at, or above you means prior to retirement. And, just because others on this board can do it, does not mean you can. Just about anyone who has successfully retired will tell you the key is to know your expenses, your needs, and your spending habits. I personally don't think you can successfully make major changed to your spending habits after retirement. An old friend of mine once told me, after loosing his job, 'You know you have to spend less, but it is real hard to do'.
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Old 11-22-2008, 10:40 AM   #19
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Our retirement budget is less than 25% what we were hauling in in gross earnings. There is no substitute for planning. Rules of thumb are for the lazy or inexperienced.
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Old 11-22-2008, 11:04 AM   #20
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If your income has varied significantly over your lifetime (mine sure did), you shouldn't have too much of a problem understanding what it will mean to live on less than you're making at career's end when you RE.


youbet reflects much of how our earning potential was. At various times we were either employed by others (steady salary) or self employed (fluctuated moment to moment) Budgeting is a skill set that sometimes takes years to master. Mistakes will be made along the way. Don't beat yourself up about it. Just enjoy
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