Successful ER on 25% of pre-retirement income?

[haha]

Leaving California may not be as money saving as it appears. Where you live can strongly affect the way your money is used. I moved from an area near central LA to the beach, and my expenses dropped considerably because I no longer wanted to get the hell away every weekend. The air was better, and why go anywhere if you live 2 blocks from the Pacific Ocean? Maybe occcasionally head out to the mountains.

To a somewhat lesser extent, I feel the same here in Seattle. Some costs are a bit higher here than the national average, like housing, and since wages are high, getting anything done is apt to cost more. But again, as long as escaping the weather is not a problem for a person, there is no driving need to escape on vacations.

If someone lives in a very attractive place, it can be hard to move away, and I for one would not make any decisions that seemed to make a move to a cheaper place necessary. Unless of course I were about to go crazy on my job and I had thoroughly explored ways of improving my work satisfaction and had at least tried some of them.

Ha

 

[Midpack]

I don't want anyone to think that I am disagreeing with the idea. I just think it is impractical as a physical tool to do that. On the flip side all the planning and calculating in the world will not account for everything either and will not be always 100% or 0% or anything in between.

Of course it won't be practical for everyone, but that does not make it categorically "impractical as a tool" in preparing for a retirement spending budget. I also opened my post saying "there is no universal answer."

Many here and elsewhere have indeed reduced their spending to projected retirement levels, or as close as possible, to test the waters before pulling the plug. I didn't originate the idea, it's recommended in many published retirement books/websites as well. We most certainly did it. Although there were some minor differences in several expense accounts, they were all easy to anticipate in terms of +/- change if not in exact dollars. Having finished my second year retired, I can confirm that our planning method was sound for us - our spending has been well within 5% of expected.

And it beats picking a % out of thin air, or even someone else's actual %.

If you have another suggestion that would help the OP, I am sure it would be welcome.

Reminds me of being back at work, 'I don't have any better ideas of my own, but I'd like to criticize yours anyway...'

 

[Live And Learn]

I retired on about 25% of income (income varied considerably annually with bonus), but we always lived well below our means. There is no universal answer of course.

Goes almost without saying that you have to track what you're actually spending now for the plan to have any credibility. Not to insult anyone, but people post here who are considering retiring and they've never tracked their spending, much less vs a budget.



IMHO everyone should spend at least one year living at their projected retirement annual spending level before retiring to make sure it can be done. I wouldn't trust myself to what I think I might do on paper, might work, might not (then what?). We lived at the reduced spending level for 3 years before I retired. And our annual spending target was built on:

• what we actually spent in each of the 3 years before [edit: factor in expected changes in clothing, travel, etc. - ours were minor and predictable for the most part]
• plus an "accrual" amount for major expenses that don't occur regularly (cars, roofs, major home repairs/replacements/remodels)
• plus an amount for health care insurance before/after Medicare.

Add up those three and if it's 25% of current income, I'm not sure what others say matters...best of luck!

+1 !

I will be about about 30% of my curreng gross income once I retire. Some of that saves comes from expense reduction (approx 10% of current income from downsizing home therefore reduced insurance, taxes and maintenace costs), tax savings (approx 20% of current income), 401k contributions (10% of current income) and elimination of all other savings contributions (30% of current income).

Like Midpack: I've tracked expenses for 5 years and know exactly what I spend, and my budget includes "accruals for major expenses". My actual retirement depends upon HI which I'll know more on October, so I'll pull the plug if it turns out as I hope.

Therefore - I'll be at 30% of current income but I'll have no reduction in expenses (in fact, a couple of items are budgeted higher than todays spending - vacations and "pocket money" among them).

I'm with Midpack - give it a trial run for a couple of years and see if you can "tolerate" the change. There's no sense retiring if you're going to be miserable.

Perhaps you just need a j*b change ?

 

[Live And Learn]

Of course it won't be practical for everyone, but that does not make it categorically "impractical as a tool" in preparing for a retirement spending budget.

Many here and elsewhere have indeed reduced their spending to projected retirement levels, or as close as possible, to test the waters before pulling the plug. I didn't originate the idea, it's recommended in many published retirement books/websites as well. We most certainly did it. Although there were some minor differences in several expense accounts, they were all easy to anticipate in terms of +/- change if not in exact dollars. Having finished my second year retired, I can confirm that our planning method was sound for us - our spending has been well within 5% of expected.

And it beats picking a % out of thin air, or even someone else's actual %.

If you have another suggestion that would help the OP, I am sure it would be welcome.

+1 and +1 again.

The "point" of living on your retirement budget is to understand if you will feel the "pinch". Perhaps we should call it "Adjusted Retirement Budget" going forward, defined as "Retirement budget + / - those expenses that are KNOWN changes". The known changes would be work related expenses (commutation costs, work clothing dry cleaning), perhaps income tax (needs individual analysis), and mortgage expense (assuming that you've not paid it off pre-retirement but will have it paid off by retirement). Everything else is a lifestyle change and you need to know if you can deal with it.

Reminds me of being back at work, 'I don't have any better ideas of my own, but I'd like to criticize yours anyway...'

LOL - exactly ! Had never heard that one before but I'm going to be using that at w*rk soon !

 

[youbet]

The "point" of living on your retirement budget is to understand if you will feel the "pinch".

The point of planning for FIRE is to ensure there is no "pinch" to feel in retirement! If you plan on spending approximately the same, or perhaps a bit more, in RE as before, you're already testing your retirement budget.

Instead of "living on your retirement budget" I preferred to retire on my living budget.

 

[Live And Learn]

[

The point of planning for FIRE is to ensure there is no "pinch" to feel in retirement! If you plan on spending approximately the same, or perhaps a bit more, in RE as before, you're already testing your retirement budget.

Instead of "living on your retirement budget" I preferred to retire on my living budget.

Agree wholeheartedly. In this case the OP is asking if he "can" live on 25% of his current income, and he specifically states that he won't be spending approximately the same. Midpack and I are trying to give him a way to determine if his ER plan is feasible.

 

[GolfingDuo]

Okay so I guess I am the only one who can't see how to physically live on my retirement budget while not in retirement. I am not trying to bust anyone's bubbles here. If it is because I am dense so be it.

I can envision what I will be spending and needing for income in the future.

Do I have to actually tell my bank, "Hey look, I know I have a few more years left on my mortgage. I would like to suspend that for a year so I can see if I will be able to live within my retirement budget." Oh let's even go so far as to say I want to stop paying my life insurance too since I won't be paying that in retirement either. Oh please keep me covered okay? Oh one more tell my state that "Hey I want to pay less tax on my house since I am trying to see if I can make it in retirement. My new state will only be about half or less of what I am paying so just take this for now and well I will see if I can make it.

This is also again not taking into account with trips to England or France. Hmmmmm I just dont see that. Oh boss hey I am going to go to England for a month. Can you just do without me and can you still pay me? Yeah that will go over like a wet sock.

Look in no way am I discounting the idea but unless I can wrap my hands around the physical aspect of it then I can't see how I can make it work.

Back to the original post though at 25% of what income? What are expenses now? Will any of them change? As someone asked is your income in the ultra rich? Is your income in the lower income bracket and you are living pay check to pay check now? Is the income just generated from savings or is there a pension or two in there?

I am just saying.

 

[MichaelB]

Okay so I guess I am the only one who can't see how to physically live on my retirement budget while not in retirement. I am not trying to bust anyone's bubbles here. If it is because I am dense so be it.

./.

I am just saying.

Or, you can create lifestyle and budget now that is equivalent to the one you would afford in retirement (the 25%), and see if you can live with it. It's not about the mortgage so much as it is controllable and non-work related expenses, such as dining, travel & entertainment, etc.

If the retirement involves lowering your standard of living, it's not a bad idea to test drive the lower standard to see if it fits.

 

[ShortInSeattle]

Or, you can create lifestyle and budget now that is equivalent to the one you would afford in retirement (the 25%), and see if you can live with it. It's not about the mortgage so much as it is controllable and non-work related expenses, such as dining, travel & entertainment, etc.

If the retirement involves lowering your standard of living, it's not a bad idea to test drive the lower standard to see if it fits.

+1. When it comes to things like a soon-to-be paid off mortgage, sure just do the math. I agree it's the other things that can be tested. For example, it's easy to say you'll spend less on eating out and entertainment, but will you? It's as much about knowing yourself as it is the numbers.

SIS

 

[enjoyinglife102]

I used the midpack approach tracking my spending for years to understand my needs and wants. Of course nobody can entirely replicate what their passive income years will look like but using the information I tracked filled in a lot of the blanks. There isn't one aspect of any of this that doesn't involve some kind of projection, assumption, forecast, estimate, liklihood, trend, plan or even a plain old guess. Whatever works for each of us but I would have been w**king the past four years rather than loving life if I didn't gain the confidence to pull the trigger that understanding my expenses provided. Personally, I think there is too much worry about running out of money and not enough worry about running out of life.

 

[ERD50]

All of that is true but it is not living in within those limits. It is projecting and computing. It is not actually living is the point. We can make assumptions. Those are great rules of thumb for planning purposes they are great tools.

Midpack is a very good poster here and a lot of great information and experience is packed in that 29 year old . I don't want anyone to think that I am disagreeing with the idea. I just think it is impractical as a physical tool to do that. On the flip side all the planning and calculating in the world will not account for everything either and will not be always 100% or 0% or anything in between.

...
If you have another suggestion that would help the OP, I am sure it would be welcome.

Reminds me of being back at work, 'I don't have any better ideas of my own, but I'd like to criticize yours anyway...'

Wow, Midpack, pretty harsh, isn't it?

He did make suggestions, he showed how one can obviously estimate/project their retirement expenses, same as most of suggest to others. Like in his example, do you really need to stop paying your mortgage for a year to know what it would be like to not have a mortgage payment? No, you can project that.

While some people might be able to live on retirement income before they retire, it clearly does not apply to the OP. He plans on moving to a lower cost area when he retires. That is not likely practical while he is working, is it? Even for those who can, it probably involves some projection anyhow, health care (I believe you mentioned this), commuting, etc. And many of us would want to do things we can't do when tied to a job - some of those cost (travelling), while some save (time to DIY).

And you did say "everyone should do this" - sorry, but that seems silly since so few could realistically come even close. It's not useful, and IMO, you shouldn't take it so personal and get so defensive when others see it differently from you.

-ERD50

 

[GolfingDuo]

Or, you can create lifestyle and budget now that is equivalent to the one you would afford in retirement (the 25%), and see if you can live with it. It's not about the mortgage so much as it is controllable and non-work related expenses, such as dining, travel & entertainment, etc.

If the retirement involves lowering your standard of living, it's not a bad idea to test drive the lower standard to see if it fits.

You are right is is about controllable and non-work related expenses. I know that I will eat out more in some places and times but less at other times. Will that even out?

That is the point of the exercise. It would seem that it still is a calculator function instead of a physical function.

+1. When it comes to things like a soon-to-be paid off mortgage, sure just do the math. I agree it's the other things that can be tested. For example, it's easy to say you'll spend less on eating out and entertainment, but will you? It's as much about knowing yourself as it is the numbers.

SIS

That has been my point the whole time. It is a math equation. If you have an idea of what income you need to live within than adjust your spending accordingly on the calculator and you are there. Knowing yourself and what you plan to do in retirement is the key here.

Sorry everyone for me not seeing it as physically making myself adapt to a budget of 100% of my current income or 25% of my current income. I guess it is because I just can only see the projection of expenses. I cannot see the test drive as nothing more than a calculation.

If the OP is planning on sitting around the house watching grass grow than yes 25% is probably pretty easy to live within. If they plan on traveling the world to a new place every month then unless they are Warren Buffett they probably can't make it with that.

 

[Shanky]

For context, we would be going from the 375K-450K range now to about 90K until SS kicked in. Current Taxes are well into 6 digits for Fed. On paper, 90K looks doable and taxes look very low, especially as we spend our after tax savings, Kids are launched and we current are saving over 150K a year, but that has not always been the case. The key is looking good on paper is different then actually doing it. We did have modest income early in my career, especially since my wife left the workforce over 20 years ago.

 

[Bikerdude]

For context, we would be going from the 375K-450K range now to about 90K until SS kicked in. Current Taxes are well into 6 digits for Fed. On paper, 90K looks doable and taxes look very low, especially as we spend our after tax savings, Kids are launched and we current are saving over 150K a year, but that has not always been the case. The key is looking good on paper is different then actually doing it. We did have modest income early in my career, especially since my wife left the workforce over 20 years ago.

So if taxes are 125k and you save 150k you currently live on about 125k? Going to 90k is not (that) much of a change.

 

[wanaberetiree]

For context, we would be going from the 375K-450K range now to about 90K until SS kicked in. Current Taxes are well into 6 digits for Fed. On paper, 90K looks doable and taxes look very low, especially as we spend our after tax savings, Kids are launched and we current are saving over 150K a year, but that has not always been the case. The key is looking good on paper is different then actually doing it. We did have modest income early in my career, especially since my wife left the workforce over 20 years ago.

I have doubts comparing income levels vs fed taxes in %'s. Who cares about the income I used to have and how much my fed taxes were?!

I would try to answer these questions - how much do you spend now on bare necessities and how much would you need in addition for discretionary spending. And it would help me find the correct answer to your initial question.

 

[Mulligan]

One requirement for me when planning my ER budget was that I would have no lifestyle change. I could maintain my volunteer work, even expand it a little. (It is not a costly activity). Same for my hobbies.

I could go out to eat now and then with my ladyfriend, just as I have been doing all along, without breaking my budget. If there is something I need to buy, I buy it. I often go months without using my credit or debit card and that has not changed since I ERed.

Related to the "no lifestyle change" requirement is one in which I build into my budget a cushion or surplus I can use to cover any small, unforeseen expenses. I bought a new PC last year, I had it covered. I was a little spendy with cash one month, I had it covered. I know these things won't repeat every month.

And even for some regular expenses which have risen in the last few years, I have it covered. The cushion has shrunk a little bit but it still averages about $400 a month.

I think like you do Scrabbler budget wise. I was not going to retire until I was assured everything stayed the same. Despite detailed budgeting for retirement, crap always came up. So I got around it by just adding $350 for "whatever" on top of my $100 "unexplained expenses". This has worked out well for me, as I also still budget for monthly savings that still is a priority that I won't trim. I agree with Midpack too on living a year in retirement on planned ER income. Yes, lifestyle could change in retirement, but you can factor that into the equation, such as change in housing costs.
I would be worried for a person who lives "a certain lifestyle" and then is going to drastically cut expenses just so they can ER.
One of my favorite sayings.." There is only one thing worse than being poor. That is being rich first, then becoming poor." Saying it, and being able to do it day in and out without practice may become a frustrating experience. Frugal type people generally don't have this to worry about as they are minimalists to begin with. Assuming of course they don't have to downscale their budget to ER.

 

[ERhoosier]

So if taxes are 125k and you save 150k you currently live on about 125k? Going to 90k is not (that) much of a change.

Good point. Even many articles claiming you should live on "x" percentage of your w#rking income don't precisely account for changes in effective tax rates after retirement.

 

[Live And Learn]

So if taxes are 125k and you save 150k you currently live on about 125k? Going to 90k is not (that) much of a change.

Shanty - look through your spending using your checking account and credit card statements to see where the 125k is going. Look at what you could easily give up (maybe you go on three trips per year and could just do 2 ?) to get your 125k down. Then look at the remainder of the spend and think about it the other cuts you'd need to make. And really think about if it will "hurt" to give those things up.

For comparison my budget is 88k per year, but of that I have 29k budgeted for healthcare (HI plus out of pocket costs). I dont have expensive tastes; my vacation budget is 4k a year, my "buying stuff" budget is 2k a year.

 

[dunkelblau]

I guess only you can decide whether that level of income can cover what you want to be spending. You'd probably need to examine real-life numbers of someone who is living like what you envision. I wouldn't expect mine to drop by that much, perhaps because I got all my wage bumps early on and basically no raises over the past decade. Hitting the wage ceiling made it easier for me to decide to go, if I was climbing up a J, I admit I probably wouldn't, even after reaching target. Although I still might if the working conditions were not to my liking.

 

[W2R]

If I retire now, it would be about 25% of current income. We would have to leave California for a lower cost state and tone down the life style. Kids are launched. Our Fire income would be comfortable by many standards, but not compared to our current lifestyle costs. Anyone know of a successful downshift by that much? Not enjoying work anymore, but it is lucrative. Retirement income would be less then our Federal Tax bill is now.

As other have pointed out, there should be no need to cut back your spending since (hopefully) you are spending roughly as much as or somewhat less than your proposed retirement spending, while saving for retirement.

IMO it would be a difficult task at best to exactly replicate your retirement spending pattern right now, but that does not mean you should not do your best to approximate it. By cutting back, you will reach retirement faster, too.

 

[ESRwannabe]

I've been living on less than half of my w-2 income for many years. All my extra income has gone into investments which now bring in about as much as my living expenses every year. I'm 37. I wouldn't be surprised if I am living off only 25% of my total yearly income by my mid 40s.

 

[Shanky]

I calculate it would take 140K a year to continue current lifestyle in California (Excludes current savings rate and lower tax bill and lower charity $ upon retirement, so 90K would still be a significant reduction from that. My hope is we could have a scaled down, yet comfortable lifestyle in the Southeast US for 90K. All I was really looking for are any examples where someone actually retired with that much of an income step down. Otherwise, I will need to work about 8 - 10 more years to keep current spending assuming a 3% SWR. My other assumption is most folks scale down $$$ donations to charity in retirement and donate more time instead.

 

[explanade]

You guys comparing after-tax income pre retirement with after-tax income post retirement?

 

[Shanky]

yes

 

[Onward]

The "x% of income" guideline for retirement has never made any sense to me.

I'm living on less than 25% percent of pre-FIRE net income and doing fine.