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The 80% figure; professionals discover what we already know.
Old 12-02-2011, 10:39 AM   #1
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The 80% figure; professionals discover what we already know.

Here is an article that questions the orthodoxy of the 80% figure for retirement income. FYI, I'm currently planning on my net income (ie after tax) in retirement being 33% of my pre retirement income because that's what I spend right now.

Are You Saving Too Much for Retirement? - Yahoo! Finance
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Old 12-02-2011, 02:01 PM   #2
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I've always believed the 80% rule of thumb to be bunk. It might be in the ball park for someone who is living paycheck to paycheck, but for those who LBYM it would typically be way to high. My spending is a lot less than 80% of my income and I'm sure that is true for many others on these boards.
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Old 12-02-2011, 02:24 PM   #3
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Excellent article. They could have left out the last paragraph though. I would be uneasy withdrawing 6% even for the first few years.
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Old 12-02-2011, 03:11 PM   #4
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Originally Posted by nun View Post
Here is an article that questions the orthodoxy of the 80% figure for retirement income. FYI, I'm currently planning on my net income (ie after tax) in retirement being 33% of my pre retirement income because that's what I spend right now.

Are You Saving Too Much for Retirement? - Yahoo! Finance
Your planning is sound IMO. If it costs you "x dollars" to live right now, it will cost about the same to live the same sort of life after you retire. You will spend less on work-related expenses, but that savings is not huge. If you plan to travel extensively or engage in other expensive pastimes, you can adjust accordingly.

I have been spending about 25% of my gross pre-retirement income so far, but this year that is up a little. I am still spending less than 33%, though. On the other hand, I spent less than 25% before ER, because I was way way behind on my retirement savings and had to catch up, and then there were taxes as well as SS, medicare, and pension contributions.

I am enjoying the money that I spend on luxuries and pastimes a great deal more now than I would have while working, because I have more time to enjoy them. So, I am glad that I am able to spend more now than I did before retirement.
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Old 12-02-2011, 03:14 PM   #5
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Quote:
Originally Posted by nun View Post
Here is an article that questions the orthodoxy of the 80% figure for retirement income. FYI, I'm currently planning on my net income (ie after tax) in retirement being 33% of my pre retirement income because that's what I spend right now.

Are You Saving Too Much for Retirement? - Yahoo! Finance
A quote half way down article:

Quote:
Do your own math. Pre-retirees should try to calculate those discredited rules of thumb and estimate their own retirement needs more specifically. Look at how much you're spending now, and see which costs you think will disappear when you retire, or during your retirement. For example, when will you pay off your mortgage and finish helping your kids pay for college? How much will you save in taxes once you're not working? Add in more for costs, such as health care, that could go up.
The 80% rule is a lazy man's way of doing math. The devil is always in the details.
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Old 12-02-2011, 03:22 PM   #6
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Using a preset amount of one's former income is useless. To use an extreme If I make $600,000 per year yet only spend $120,000 per year that's 20%. So now all of the sudden I'm going to jump up to 80% a year and spend $480,000? Absurd.

The better barometer is what did you spend before retirement and how will your retirement affect those spendings. I'm actually spending well below what I spent while I was working. No more dry cleaners, fewere meals out, less gas and maintenance on the cars, no more work clothes, etc.

Where do they find these people? How much I made was never the issue...it was how much did I save of what I made and how much did I spend to live on.
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Old 12-02-2011, 03:36 PM   #7
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When I first started out planning for retirement, I too used the 80% rule and figured I'd be working to "normal" retirement age or even beyond. As time went on, it just didn't make sense. I started planning for less and early retirement became a possibility. When I reached my 50's, I started using current expenses for planning, less those that will disappear at retirement. With those numbers and comments made on various boards, retirement at 60 is now a certainty.

While JmfromTx is uneasy withdrawing 6% even for the first few years, it's actually part of my plan. Not all of our retirement income streams will be coming online at the start, so the IRA will take a larger hit until they do start up, followed by 0% withdrawals for at least a decade (MRW's transferred to a taxable account). Projections show the portfolio will survive this with as low as a 2& annual return.
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Old 12-02-2011, 04:12 PM   #8
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Using a preset amount of one's former income is useless. To use an extreme If I make $600,000 per year yet only spend $120,000 per year that's 20%. So now all of the sudden I'm going to jump up to 80% a year and spend $480,000? Absurd.

The better barometer is what did you spend before retirement and how will your retirement affect those spendings. I'm actually spending well below what I spent while I was working. No more dry cleaners, fewere meals out, less gas and maintenance on the cars, no more work clothes, etc.

Where do they find these people? How much I made was never the issue...it was how much did I save of what I made and how much did I spend to live on.
I agree. As I have written in other similar threads, I twice reduced my weekly hours worked, the first time to just over half of what I had been earning as a full-time worker, and again to a level about 1/3 of my full-time earnings. Eighty percent of which pre-retirement salary?

Instead, used my pre-ER expenses as a starting point and adjusted them to fit my ER budget. Basically, it was an elimination of FICA taxes (YAY!) and commutation expenses (Double YAY!) in exchange for greater health insurance expenses, at least at the start. The rest of my expenses changed a little or not at all.

Once I had that figured out, I looked to see if I could generate that much in income (not being eligible for SS or my pension or unfettered IRA withdrawals, I have to rely solely on my taxable account investments) plus some more as a cushion to cover me against unforeseen expenses and inflation.
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Old 12-02-2011, 06:46 PM   #9
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In a previous thread, we discussed how our spending compared to our final incomes. IIRC, I was one of the few who admitted to spending 100% or more currently. Though this wasn't to plan, I had it covered by back-ups.

While I agree that any "rule" (80% or otherwise) is fraught with danger(s), it's not a bad starting point for beginners, IMO. True, an "exact" retirement budget would be a much better way to plan, but we don't all have the luxury of knowing 1) how our lives will turn out 2) how our retirement spending will vary from 80%. Ideally, each year (or each planning session) one should hone in as much as possible on his/her own situation regarding retirement spending. In most cases, the earlier the retirement, the lower the % of final earnings. Of course, this too is a generalization.

What I would suggest to those who pitch the "80% rule" is to advise folks to start at 80% and then adapt as they get closer to retirement and as it becomes clearer what their retirement budgets may look like. YMMV is a good rule too!
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Old 12-02-2011, 11:00 PM   #10
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What kind of expenses go away? Off the top of my head, fuel or transportation costs, maybe more lunches at restaurants than you'd have.

What else?

If you were already LBMY while working, there may not be as much fat to cut once you stop working?
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Old 12-02-2011, 11:28 PM   #11
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What kind of expenses go away? Off the top of my head, fuel or transportation costs, maybe more lunches at restaurants than you'd have.

What else?

If you were already LBMY while working, there may not be as much fat to cut once you stop working?
Those will be my major savings. My car commuting costs are $200 a month for me so when I retire that will be a nice bonus. Also I won't be buying lunch each day in the cafeteria which is another $150 a month I'll save. $350 a month will pay my federal taxes or my healthcare premium.
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Old 12-02-2011, 11:31 PM   #12
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Hmm, I live a mile from work but I drive home for lunch most days. So at most I'm putting on about 80 miles a month commuting.

I may actually tend to eat out more for lunch, maybe go for coffee more ...

I guess if you withdraw from taxable accounts, you pay cap gains which is less than income taxes?
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Old 12-03-2011, 02:18 AM   #13
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My expenses will probably stay the same. First, I will have to pay at least $6500 a year for medical insurance above my current contribution. Second, I plan to travel before the Dr says "sir , do not venture far from a good medical centre".
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Old 12-03-2011, 08:22 AM   #14
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What kind of expenses go away? Off the top of my head, fuel or transportation costs, maybe more lunches at restaurants than you'd have.

What else?

If you were already LBMY while working, there may not be as much fat to cut once you stop working?
Not sure if you are arguing for the 80% rule, but my main case against it is the 30+% I was putting aside for retirement that I no longer do since I'm now in retirement. That's not really an expense, but it shows how meaningless it is to base retirement needs on your income if you're not living paycheck-to-paycheck.

A second big one is taxes. No FICA, and I can be tax efficient on where I draw my money from for living expenses.

Otherwise, you're right, at least in my case. My other expenses have pretty much stayed the same. Basing my retirement expenses on my pre-retirement expenses was pretty accurate, after I added health insurance. But basing in on my pre-retirement income was meaningless.
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Old 12-03-2011, 09:10 AM   #15
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Basing my retirement expenses on my pre-retirement expenses was pretty accurate, after I added health insurance. But basing in on my pre-retirement income was meaningless.
80% income always annoys me because income is never defined, is it gross or net.

Using this "rule of thumb" just points the the laziness of the retirement industry. They should start by asking what the pre retiree spends and pays in tax so a post retirement estimate can be made to account for no retirement savings, FICA, commuting, proposed cruises etc.

I also have an issue with 80% being too high because most people will simply never be able to save enough to replace 80% of their income even including SS because they don't save enough. Consider a married couple earning $100k a year, 3% inflation, 3% annual pay increases and 6% investment return. If they save 10% of their income, increasing the amount by inflation each year, for retirement for 40 years they will end up with $2.48M, annual income of $317k and a SS benefit of $114k. I'm just projecting using inflation, investment returns and current SS calculators, no accounting for politics. Using the 4% rule their investments will sustainably generate $99k and adding SS they'll have $213k income. 80% of their final income is $253k so they are $40k short. To make the plan work they have to save 15%. That might not seem like much to some on here, but most people would be hard pressed to do that.
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Old 12-03-2011, 09:36 AM   #16
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Basing my retirement expenses on my pre-retirement expenses was pretty accurate...... But basing in on my pre-retirement income was meaningless.
+1

At the time of retirement, I calculated I would require 43% of my final salary to sustain my pre-retirement living standard into retirement. I have done so, and 6 years later (and with 6 years of inflation added), I now require 55% of my final salary.

I find 'retirement calculators' using the 80% (or higher!) figure absolute rubbish.
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Old 12-03-2011, 09:57 AM   #17
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Not retired yet but plan on it in three years. Retirement spending should be about 38% of pre-FIRE gross income after the recent near economic meltdown. Being in sales within the building products industry, I would love to be able to spend 38% of pre-meltdown income. And if I could get 80% pre-meltdown? Time to party like a big dog!
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Old 12-03-2011, 10:08 AM   #18
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Agree that retirement income requirement should be based on expenses versus some % of salary. This is Joe D's YMOYL; when the lines cross - ta da! FI.

So, we've used our actual spending to set our estimated retirement expenses and adjust from there. We've found, not surprisingly I think, that our actual expenses (excluding savings and taxes) as a % of gross income have trended downward; from 55% in 2008 to 38% in 2010. That's due in part to raises but, largely to more savings.
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Old 12-03-2011, 10:30 AM   #19
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Still working, I guess I wouldn't have to make IRA, 401k and additional savings to my taxable accounts.

Guess I never thought of those categories as spending.

I spend quite a bit on travel and one of the things you'd want in retirement when you have time is to at least travel as much as you were before.
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Old 12-03-2011, 10:59 AM   #20
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One difficult thing to calculate in ER versus when I was working was income (not FICA) taxes. This was because my health insurance premiums would become partly deductible on Schedule A but exactly how much of it which would be deductible depended on my AGI. And the AGI was not always consistent from year to year because of uneven cap gains distributions, even long-term cap gains which ended up (federally) taxed at 0%. I actually included a skeleton version of my income tax forms in the spreadsheet to figure this out. I also had to link a skeleton version of my state income tax form because I could deduct state income taxes on my federal return.
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