Scott Burns: Older = Cheaper

[REWahoo]

Scott Burns column today describes how, maintaining the same standard of living, a retired couple needs less than 45% of the income of a working family of 4 making $90,000 per year. I think it oversimplifies some aspects (health care?), but it does illustrate why the often-repeated requirement that you need 70-80% of pre-retirement income isn't necessarily the case.

(Note: you may have to register to view the column.)

He also provides a rule of thumb I had not seen before regarding the cost of living for each added person in a household:

“One commonly used algorithm of family expenses is that the cost of a household rises as the square root of the number of members.

The economists, social scientists and social workers who think about this stuff have found this little rule works as well as tons of surveys and measuring.

By this rule of thumb, a single person can live at a cost of 1. A couple can live at a cost of 1.41, not 2. A couple with one child can live at a cost of 1.73, and a couple with two children can live at a cost of 2.”

 

[youbet]

Scott Burns column today describes how, maintaining the same standard of living, a retired couple needs less than 45% of the income of a working family of 4 making $90,000 per year.  I think it oversimplifies some aspects (health care?), but it does illustrate why the often-repeated requirement that you need 70-80% of pre-retirement income isn't necessarily the case.

Mr. Burns trys to do a better job of estimating retirement expenses as a percentage of pre-retirement income, and, who knows, maybe his take on it is more accurate.  But the real problem is that using pre-retirement income as a basis for retirement expenses is a poor method at best and a disaster at worse.  Why don't these folks do an apples to apples comparison and talk about retirement expenses vs. pre-retirement expenses?

 

[2B]

I think he assumed that Medicare was involved but health care would also be an "equivalent cost."  However, the working Youngs would be more likely to have it through his job. Standard of living is also a nebulous term. I was much more interested in pricey toys when I was 25 than I am now. Before I get myself an expensive toy I ask myself how much I'm really going to use it. I price compare more extensively. Way back when, I just bought it.

I've seen the living expenses drop-off occur big time for me as our kids moved out.  Assuming none of them become boomerang babies, I expect our costs to follow the scenario in the Scott Burn's article.  Looking at my parent's and in-laws financing, it gets even more pronounced.

One big assumption is that the Olds have paid off their house and kept their credit cards under control.  The popular financial press (often full of it) talks about the HELOs and credit card debt of the boomers.  Obviously, to fit the Burn's profile of the Olds, reasonable financial planning would still have to have been made years ago by the Olds.  

Also for an equivalent comparison, the Youngs standard of living couldn't be partially financed with HELOs or other consumer debt.  That's also a reach for "normal" people with a young family.

 

[Rich_by_the_Bay]

Mr. Burns trys to do a better job of estimating retirement expenses as a percentage of pre-retirement income, and, who knows, maybe his take on it is more accurate. But the real problem is that using pre-retirement income as a basis for retirement expenses is a poor method at best and a disaster at worse. Why don't these folks do an apples to apples comparison and talk about retirement expenses vs. pre-retirement expenses?

Totally agree with Youbet. In fact, the more of a FIRE saver you are pre-retirement, the lower percentage of your gross income you need, post-FIRE.

DW and I looked at our expenses. They are currently about .55 of my AFTER-TAX income. Of course, it would have to be somewhat higher given ongoing income tax after FIRE, but even factoring that in, it is not likely we will need more than .65 of preFIRE gross income to enjoy ourselves.

 

[d]

do an apples to apples comparison and talk about retirement expenses vs. pre-retirement expenses

Bruns does that!  He notes:"the spending power they need to replace would be $43,321 instead of $70,310" .... and then the oranges to oranges comparison: "need only 45 percent of the Youngs' income to have the same living standard"

 

[youbet]

Yeah d, you're right.  He does mention "spending power."  But he also keeps throwing in "income."  I think he and the other writers would do folks a favor if they would just talk about expenses pre and post retirement, independent of income.

 

[d]

writers would do folks a favor if they would just talk about expenses pre and post retirement, independent of income

agreed (though expenses will obviously be limited by post-retirement income, and we do tend to worry more about where it's coming from than we do about where it's going.)

 

[Nords]

By this rule of thumb, a single person can live at a cost of 1. A couple can live at a cost of 1.41, not 2. A couple with one child can live at a cost of 1.73, and a couple with two children can live at a cost of 2.”

Yeah, but he neglected to add the "Teenager's Corollary", where the cost of feeding them (compared to adults) is raised by a square factor.

 

[cute fuzzy bunny]

The cost ratios arent valid at all in my case. The difference in costs for me as a single arent that far off of the married version. The baby also hasnt created a big cost change, except for some voluntary filling of the living room with toys and board books.

 

[2B]

Yeah, but he neglected to add the "Teenager's Corollary", where the cost of feeding them (compared to adults) is raised by a square factor.

The cost incurred by having children seemed to be significantly affected by their age and sex.  My daughters always seemed to cost more once the gender difference became apparent (around middle school).  My son was always less expensive until car insurance.  All of their costs continued to rise through high school and college.  After college, the glorious relief!  

Of course, there is the wedding which one hopes is the end of major expenses.

 

[2B]

The cost ratios arent valid at all in my case.  The difference in costs for me as a single arent that far off of the married version.  The baby also hasnt created a big cost change, except for some voluntary filling of the living room with toys and board books.

I'll agree with CFB. I think I saved money getting married versus all of the cash spent on dating, etc. Of course, the extra income was nice for a few years before the babies made my wife a drain on society.

 

[cute fuzzy bunny]

In our case we saved a LOT of money, since we got to sell my wifes old house (and we could live for 10 years off the proceeds from that!)...but also because we had all the same stuff as my stuff wore out I had a new or nearly new replacement sitting in a box in the garage or in the storage building.

Even taking that out of the equation...it seems lifestyle is a big factor. People who like to buy expensive clothes or live lavishly may find very little optimization. People who pay retail for their baby stuff may find kids pretty expensive.

I'm sure my son is going to get a LOT more expensive over time.

 

[2B]

I'm sure my son is going to get a LOT more expensive over time.

The nice thing about spending money on your son as he gets older is that its things you like doing too. We got to fish, hike and camp together. My girls tolerated it at best and got out of it whenever they could. Dance recitals with 8 year olds are not very exciting even if your kid is in it. It was also hard to get excited about their latest doll they "had to have."

 

[shorttimer]

what is the most true is that percentages don't matter. It is really tracking what things cost to you.
Some people like to spend $25 on a bottle of wine at a restaurant in an evening, wearing nice clothes and driving a 2006 Lexus from their McMansion. Others rarely go out to eat and are happy and sip a beer in shorts and t-shirt with their grilled chicken with a paid for 1998 honda civic as their main car sitting in the garage of their paid for middle class house. Huge difference in budgeting between the two and how they have to budget for retirement.

so, just write down what your expenses are for several years and you will know what your expected expenses are for food, taxes, eating out, etc. There will be some variation but if you have been saving for example 30-40% of your income after taxes, like many of the people here, you are obviously living on much less then your earned income.

Having your children financially independent certainly makes your expenses really go down, if you have paid even some for college and weddings.

 

[jdw_fire]

DW and I looked at our expenses. They are currently about .55 of my AFTER-TAX income. Of course, it would have to be somewhat higher given ongoing income tax after FIRE, but even factoring that in, it is not likely we will need more than .65 of preFIRE gross income to enjoy ourselves.

Rich, if your current expenses are 55% of your current after-tax income then the tax bill on your current income will be higher than the tax bill would be on a retirement income that just covers those same expenses.  Therefore you will need a smaller percentage of your preFIRE gross income to cover your current expenses since you won't be paying taxes on the 45% you are currently saving after tax and your overall effective tax rate will probably drop.  (A reason said tax rate wouldn't drop is if all of your savings are pretax.)

As an example let's say your overall tax rate is 25%.  Then to get your current gross income is = (1/.55)*(1/.75)* current expenses = 2.42*current expenses.  This means that your current expenses = 1/2.42 *current gross income = 41.25% of current gross income.  Now to get  your postFIRE gross income that is neccessary to cover your after tax current expenses you will need to add back the projected taxes, which I will do here using an overall tax rate of 20% giving postFIRE necessary gross income = 41.25% of your current gross income/.8 = 51.56% of your current gross income.  (note: this analysis uses constant value dollars and tax rates.)

This math shows the case of your effective overall tax rate dropping 5% which is a guesstimate, but rest assured when you reduce your gross income your effective overall tax rate will drop even if you stay in the same tax bracket because you are paying the high marginal tax bracket rate on fewer dollars so therefore your percentage of gross income required will drop not go up.

 

[donheff]

Some people like to spend $25 on a bottle of wine at a restaurant in an evening,

True. I don't care about the clothes or the Lexus but I like my wine and my average bottle is going up, not down. All this darn ER evaluatin has forced me to confront the sad fact that my retired wine budget is about $4K. Makes me want to become a tea-totaler (NOT).

Don

 

[JonnyM]

True. I don't care about the clothes or the Lexus but I like my wine and my average bottle is going up, not down. All this darn ER evaluatin has forced me to confront the sad fact that my retired wine budget is about $4K. Makes me want to become a tea-totaler (NOT).

Don

Now there is an expense that will have to have it's own category if we ever actually tracked our expenses! We belong to 4 wine clubs that ship quarterly, plus make about three trips to NorCal Wine country each year to taste and accumulate. I'd still estimate a ballpark figure of between 1 and 2k/yr. Is it because I still have no clue and just buy what I like? : 8)

 

[donheff]

I'd still estimate a ballpark figure of between 1 and 2k/yr. Is it because I still have no clue and just buy what I like? : 8)

I don't know about you but I probably average a bottle a day. Some days none, but other days company comes over and it could be 4 or 5. It ads up, and up, and up.... Definitely worth a catagory of its own. Thank God I don't like Scotch.

 

[Rich_by_the_Bay]

I don't know about you but I probably average a bottle a day...

On yer own, or split with someone?

The way my DW has started choosing our wines from higher and higher $helves, it is getting expensive.

I pride myself in finding a nice tempranillo or parallele 45 or other values for around $7-10 then watch them creep up in price as they get discovered.

 

[donheff]

On yer own, or split with someone?

The way my DW has started choosing our wines from higher and higher $helves, it is getting expensive.

I pride myself in finding a nice tempranillo or parallele 45 or other values for around $7-10 then watch them creep up in price as they get discovered.

Definitely a split. I guess I need to start researching the good deals a bit more carefully. Or join Cut-Throat in the cheap scotch corner.