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The old retirement savings dogma
Old 11-04-2009, 10:12 AM   #1
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The old retirement savings dogma

So there are some old chestnuts in this article about what you need to retire. The classic is needing 80 to 90% of your current income. What you you guys think?

your-retirement-income-will-it-be-enough: Personal Finance News from Yahoo! Finance
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Old 11-04-2009, 10:23 AM   #2
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We could live comfortably (albeit fairly frugally) on about 40% of our current income, maybe even closer to 1/3 depending on the resolution of health insurance for FIREd folks.
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Old 11-04-2009, 10:28 AM   #3
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That is way more than I needed. I no longer put 20% into 401K, 5% a month for commuting, a couple of % for office lunch & stuff, another couple of % for business clothing, to say nothing of taxes. That is a pie in the sky type of projection for the folks who think retirement is an extentsion of a non-stop social whirl with unlimited entertainment, travel and social expense. At least that is my opinion.
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Old 11-04-2009, 10:29 AM   #4
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That is way more than I needed. I no longer put 20% into 401K, 5% a month for commuting, a couple of % for office lunch & stuff, another couple of % for business clothing, to say nothing of taxes. That is a pie in the sky type of projection for the folks who think retirement is an extentsion of a non-stop social whirl with unlimited entertainment, travel and social expense. At least that is my opinion.
Plus, if people retire once the mortgage is paid off, that's even less income you need.

When we retire we could probably also go down from two cars to one, saving on the cost of saving to buy vehicles, on insurance and on fuel.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 11-04-2009, 10:33 AM   #5
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What gets me is that if you need 90% of your current income, it suggests that you're not actually saving anything for retirement. I'd like to see what's included in that income. Is it gross or net pay.....etc
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Old 11-04-2009, 10:43 AM   #6
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I stopped reading when the article stated that an SWR of 6% was really all we should count on. What? Is the author, Cathy Pareto, smoking crack? SIX PERCENT? I could only wish.

Those folks who have put off thinking about retirement are going to have to work a few years more than they otherwise would have had to work, and that's assuming that they get serious about it at some point.

I agree with Connie who mentioned "folks who think retirement is an extension of a non-stop social whirl with unlimited entertainment, travel and social expense". I wish these people all the best. However, there seem to be quite a few of us who are not thinking of retirement in those terms.
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Old 11-04-2009, 11:05 AM   #7
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Hmmm - perhaps we should read about JWR a former poster on the other thread.

I derailed at 49 from my 'planned early retirement' at age 63. I also smoked, partied hard and ate New Orleans food for thirty years.

I 'selected' 84.6 + or - 0.2 as my life expectancy after perusing some old IRS tables. .

I couldn't find Mr Market in the Yellow Pages back in 1993 to call up and order 10% total market return. Nor did I pick the 90's for layoff - but history was kind.

Hindsight - make your decision(using the highly technical belly button method) and vary expenses - ie that which you have some control over.

0(1 yr temp work) to 6% Withdrawal over the last 16 yrs. Save aggressively and when the time comes develop the skill set to party with what you have.

heh heh heh - we'll keep the light on-er forum open for ya. .
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Old 11-04-2009, 11:15 AM   #8
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80 to 90% income replacement rule? 6% SWR? I almost expected to see the ubiquitous 12% annual return too, but no they used only 8%...

For us, the income replacement rate is going to be a lot lower. We currently spend about 25% of our income, pay 25% in taxes and save the other 50% for retirement. Saving for retirement will go away and taxes will go down about 90%+ in retirement (no FICA and a much lower income). So with a retirement income equal to only 27.5% of our current income, we can continue to live exactly like we do now, non-stop "social whirl" and all...
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Old 11-04-2009, 11:39 AM   #9
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I stopped reading when the article stated that an SWR of 6% was really all we should count on. What? Is the author, Cathy Pareto, smoking crack? SIX PERCENT? I could only wish.
I stopped reading and came straight to this forum. In a week I've learned more from here than - well, just about anywhere else about the nuts and bolts of pre-retirement planning. My XL program has never been busier.

As far as SWR, seems that would need to be less than or equal to inflation effects and a portfolio's ROR, right? At least, if one plans on being retired for 40 years?
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Old 11-04-2009, 11:43 AM   #10
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If you are living on 90% of your income before retirement, then you can't be saving much. The way to save enough to retire is to live on a fraction of your income that is far less than 80%. Unless by income they actually mean what you spend.
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Old 11-04-2009, 11:44 AM   #11
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Heck, I don't even live on 90% of my current income. Take off 401K, health, FSA, dependent care FSA, and taxes, and I'm at 68%.
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Old 11-04-2009, 11:58 AM   #12
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I believe the 80-90% rule might apply to those that live from paycheck to paycheck and are unable to save a significant portion of their income. You could easily subtract your savings rate from those numbers and adjust further for paid off mortgages/car loans/etc to get a more realistic number. Living on less than half our pre-retirement income hasn't been too challenging and we continue to add to our savings.

Just try to find a financial manager(guru) who gives that kind of advice... It really makes much more sense to base what you need to retire on an estimate of what you will spend in retirement than on pre-retirement income. I realize crystal balls can be cloudy, but it really isn't rocket science.
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Old 11-04-2009, 12:08 PM   #13
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Just try to find a financial manager(guru) who gives that kind of advice... It really makes much more sense to base what you need to retire on an estimate of what you will spend in retirement than on pre-retirement income. I realize crystal balls can be cloudy, but it really isn't rocket science.
If I exclude things that will be paid off or no longer required in retirement, like the mortgage and 401k contributions, I'll probably need 90% of what I currently SPEND to retire. I spend less than 20% of my paycheck.

This all highlights that just throwing out a statement like "you'll need 90% of your current income in retirement" is actually incompatible with retiring. What financial advisers should be saying is things like "live on 50% of your paycheck and save the rest".
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Old 11-04-2009, 12:49 PM   #14
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If I exclude things that will be paid off or no longer required in retirement, like the mortgage and 401k contributions, I'll probably need 90% of what I currently SPEND to retire. I spend less than 20% of my paycheck..
Sounds about right -- unless you're planning luxury World Cruises or an entirely different lifestyle in your retirement... Again estimating on expected retirement spending makes alot more sense than using a percentage of pre-retirement income. Selling the home & Full time RVing (boating) vice moving into a mac-mansion/country club community are likely to have very different annual spending requirements... Personally I'd love to full time RV or cruise, but DW is NOT amused by such suggestions. OH well, after 35 yrs I guess "whither thou goest I will go" has some serious caveats.
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Old 11-04-2009, 01:03 PM   #15
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I think there are a few caveats in the article that might work better if explained. Or maybe I'm just good at rationalizing.

If I read the article and assumed that the income they were talking about was after savings, then the 80-90% concept would be easier to swallow. For example, if you are making $100K/yr, and taking home $40K after taxes and savings, then it would be relatively easy to establish a retirement fund that would allow you to live on 90% of that ($36K/yr). Of course, if you are making $100K and taking home $65K with minimal savings, it's going to be a lot harder to reach that 80-90% level.

When I was working, I was saving about 35% of my after tax income, with my 401K (including matching) and personal savings. But I know plenty of people I worked with who were making basically the same as me, but had a much larger dollar amounton their paystub. It's possible they were manually depositing their savings, but since I've been FIREd for 3 years and they are still working, I doubt it.

The article did say they would need that 80-90% to maintain their current standard of living. Following my definition of income (above), that's probably pretty accurate. The question becomes whether they are saving enough to reach that goal.
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Old 11-04-2009, 03:00 PM   #16
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If I exclude things that will be paid off or no longer required in retirement, like the mortgage and 401k contributions, I'll probably need 90% of what I currently SPEND to retire. I spend less than 20% of my paycheck.

This all highlights that just throwing out a statement like "you'll need 90% of your current income in retirement" is actually incompatible with retiring. What financial advisers should be saying is things like "live on 50% of your paycheck and save the rest".
I haven't done the math but I wouldn't be surprised if my after-retirement budget came out to about 90% of my current spending. That's more or less my current expenses, minus the mortgage. Maybe 90% of current take-home pay would be a better rule of thumb for rough calculations than 90% of income.
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Old 11-04-2009, 03:13 PM   #17
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I felt able to retire when my dividend income from very stable stocks like PG, JNJ, KO etc (adjusted for income taxes and health insurance) matched my old take-home income (adjusted for just having paid off my mortgage and post-tax savings). This worked out to my gross dividend income (accessed mostly thru 72t withdrawals) being about 45-50% of my final gross income from working.
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Old 11-04-2009, 04:09 PM   #18
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Originally Posted by harley View Post
I think there are a few caveats in the article that might work better if explained. Or maybe I'm just good at rationalizing.

If I read the article and assumed that the income they were talking about was after savings, then the 80-90% concept would be easier to swallow. For example, if you are making $100K/yr, and taking home $40K after taxes and savings, then it would be relatively easy to establish a retirement fund that would allow you to live on 90% of that ($36K/yr). Of course, if you are making $100K and taking home $65K with minimal savings, it's going to be a lot harder to reach that 80-90% level.

When I was working, I was saving about 35% of my after tax income, with my 401K (including matching) and personal savings. But I know plenty of people I worked with who were making basically the same as me, but had a much larger dollar amounton their paystub. It's possible they were manually depositing their savings, but since I've been FIREd for 3 years and they are still working, I doubt it.

The article did say they would need that 80-90% to maintain their current standard of living. Following my definition of income (above), that's probably pretty accurate. The question becomes whether they are saving enough to reach that goal.
Interesting definition of income. I would be very surprised if the article writer or the 'studies' mentioned used your definition.

Quote:
Studies indicate that retirees will need to between 80% and 90% of their pre-retirement income to maintain their current standard of living. So, a reasonable target is one that will provide you with an annual income similar to the income you have now.
I would imagine those studies are seriously skewed by the vast majority of people who are not LBYM poster children and basically spend every dollar of income they get and then routinely borrow more. They wake up in their 50s (or 60s) and wonder how they'll ever be able to retire.

For those seriously interested in ER, then more realistic targets can be obtained by using your interesting 'definition' of income or wags at actual retirement spending expectations...
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Old 11-04-2009, 04:39 PM   #19
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Reads like a pretty poor article:

1. post retirement it is post-retirement expenses which matter, not pre-retirement income

2. my post-retirement expenses will initially go up due to (i) more travel (ii) more time to indulge in selected vices and (iii) higher health insurance costs partly offset by reduced commuting and clothing costs. Later on expenses will fall as and when the children become financially independent. A straw poll of friends showed that all of them had the same expectation.
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Old 11-04-2009, 05:09 PM   #20
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I haven't retired yet but have the same questions. I found that by tracking my spending (every dollar for the last 3 years), I know better how much I need to have in retirement income than using a percentage of income. If I add another 25% for taxes (too high? too low?) it looks like 80%. I figure in a mortgage during retirement too. If I downsize, that will be extra.
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