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What does '70% of salary' mean?!?
Old 11-09-2009, 09:59 AM   #1
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What does '70% of salary' mean?!?

I am looking to take early retirement in 2012. I often read e.g. that one needs 70% of one's salary upon retirement. But what does that really mean? If for example I have a salary of $100,000 but I save HALF of that (401k, 403b, liquid mutual funds), so that I am used to a take-home GROSS 'salary' of $50,000, will I need 70% of $100,000 or 70% of $50,000 upon retirement? Confusing to me. The term salary seems relative to what one has for take-home gross, or does it just refer to initial gross, not counting what is put into 401k, Vanguard liquid asset mutuals each month out of my checking account, etc.?
~randall (new here, this is my first post)
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Old 11-09-2009, 10:14 AM   #2
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Welcome randall.

We've discussed this a ton and it's pretty simple really. When FP's and others discuss retirement financial requirements in terms of pre-retirement salary, they're addressing the hoards of folks who work for gov't, MegaCorps, etc., who have steady incomes and spend based on that income.

For most here, the focus is on planning a retirement budget in absolute dollars (as opposed to a percentage of pre-retirement budget or salary) and acheiving the resources to fund that retirement budget. So, take a breath - it's not a big deal, and continue to calcuate your requirements based on your plans for what you'll need in retirement independent from what your current salary is.
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Old 11-09-2009, 10:30 AM   #3
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It means the person who wrote it is an idiot. He/she doesn't realize that there are people who don't spend all of their income.
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Old 11-09-2009, 11:05 AM   #4
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To the OP...

What you are referring to is an income replacement ratio. Google that phrase to find out more than you ever wanted to know.

An income replacement ratio is just a simplistic guide, a rule-of-thumb etc. to help someone understand about how much income you may need to have a somewhat level lifestyle after you quit working. It is based on an idea that after you retire your taxes just may go down and you probably aren't saving for retirement anymore.

It goes without saying that if you have been saving half your income that you won't need 70 percent of your past (gross) income to keep a level lifestyle after retirement. Many on this forum fall into this category. For high savers they'll only need maybe 30-40 percent of their income to live as they have been.

It's just a guide and like any guide there are some problems with the model.

If you are scrapping by on $20k/year while working you just may need all of that income and more in retirement.

If you are a fat cat making $500k chances are you would be just fine with a 10 percent income replacement ratio.

But if you are an average family with a family income of around $50-70k, then that 70 percent model may just work out fairly well. You will get some of that income from social security and possibly a pension. The rest has to come from your savings.
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Old 11-09-2009, 11:45 AM   #5
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Originally Posted by TromboneAl View Post
It means the person who wrote it is an idiot. He/she doesn't realize that there are people who don't spend all of their income.
Thank you for confirming my thoughts. That 70% figure just seemed too simplistic and speaks nothing about ultra frugal people like me who live on next to nothing compared to my gross salary. I save massive amounts of my savings, I am Mr. Frugal, so it just did not makes sense that I would need 70% of $100,000 when I take early retirement. I live a non-materialistic life except for my PC and books and art supplies, and I prefer a small house.
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Old 11-09-2009, 11:45 AM   #6
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Quote:
Originally Posted by randall View Post
I am looking to take early retirement in 2012. I often read e.g. that one needs 70% of one's salary upon retirement. But what does that really mean? If for example I have a salary of $100,000 but I save HALF of that (401k, 403b, liquid mutual funds), so that I am used to a take-home GROSS 'salary' of $50,000, will I need 70% of $100,000 or 70% of $50,000 upon retirement? Confusing to me. The term salary seems relative to what one has for take-home gross, or does it just refer to initial gross, not counting what is put into 401k, Vanguard liquid asset mutuals each month out of my checking account, etc.?
~randall (new here, this is my first post)
welcome to the board and congrats on your upcoming FIRE.

I have found that guidelines such as the one you quoted are a 'one size fits no one' recommendation.

The real answer is that it is dependent upon your lifestyle and spending habits. If you were living very comfortably on $50k then that is probably your upper bound and you could survive on less, perhaps 70% now that you don't have w*rk expenses and higher income taxes due to big salary. If you were just sqeeking by on it, then it might be the minimum. Only you can tell.

For example, I was like you and lived on a substantially lower percentage of my salary and was comfortable with it. Our budget is essentially the same (minus w*rk expenses and extra taxes plus travel) as when I was working.

With the little info you have given, it would seem that you are in good shape.

Another thought, ... you really won't know what your 'new' lifestyle and spending will be until you actually start doing it. Things change ... that's life.

Good luck to you and I encourage you to review past posts. Lots of info here from a lot of like minded people.
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Old 11-09-2009, 11:50 AM   #7
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Thank you MasterBlaster. Makes sense. I earn $100,000 a year but I live on maybe $2000/month take home (I own my home and car, have no debt, a single guy-- artist, writer, etc). When I take early retirement in 3 years (age 55) I will have a retirement pension of $3000/month, then $1500/month in social security at age 65. And about a million saved away in mutuals, 401k, etc. So I just can not figure why I would need $70,000 a year once I retire. I should be okay right, drawing maybe 2-3% from my savings on top of my pension? It is a bit scary to think of no more paycheck, but I feel like I have been so frugal most of my life and saved so much over the decades I deserve to take FIRE at age 55 and enjoy writing, art, etc.. I just want to make sure I am not screwing myself over cutting the ties with employment and a regular paycheck, as I know I have to account for inflation and medical insurance and all that stuff in the coming decades.
~randall
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Old 11-09-2009, 12:29 PM   #8
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Randall - It really isn't worth your time to figure out why the author of what your reading is an idiot or why he thinks his audience are idiots. You won't need $70k a year unless you're going to spend $70k a year... It's that simple...

Now with inflation you just might reach that level someday - cola's on pension/SS can help with that. With the resources you mention 'ER' should NOT be a problem and it sounds like you will continue to get a check bigger than what you spend. If you ever feel like spending more than what you have coming in, you have ample resources to supplement for a very long time. Enjoy what appears to be a very comfortable retirement.
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Old 11-09-2009, 12:32 PM   #9
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randall.....

It really sounds like you need to write a retirement budget. What do you want to have as income while you're retired to live your retirement life as you wish? Then use FireCalc to test the survival rate of your plan.

My guess is that you're in great shape. But you need to understand what amount does it for you. You're correct to not want to rely on a percent of current income guess. But, you need a number.
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Old 11-09-2009, 12:48 PM   #10
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Yes, I do need to figure out my retirement budget. So foreign to me, I am so used to my employer paying 100% of my medical and dental, so I have NO idea whatsoever what that insurance costs, I do not even know what the heck medicare and medicare even are all about, I am insulated from all that thus far.

I just googled and discovered that FIRECalc website/tool, very very cool, reassuring too.
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Old 11-09-2009, 12:51 PM   #11
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It is inflation that concerns me. I am old enough (52) to know that when I was 12 a candy bar was 15 cents, milk 50 cents a gallon, magazines a quarter or 50 cents. Then I see today's costs, and what they could grow to in 20-30 years. I guess I just have to be sure not to draw too much out of my savings on top of my pension and SS. (btw, What is 'ER'?)
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Old 11-09-2009, 12:56 PM   #12
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In addition, your expenses in retirement may be far different from your expenses while working.

Some may go down (clothes, gas, lunches out?), while some (maybe even those same categories) may go up (more clothes to meet different activities like hiking, etc?, higher gas costs due to more free time to travel, more lunches out with friends?). And the big one for some is health care costs.

So don't listen to some writer, figure out your wants/needs for retirement and budget accordingly. There is a wide range of numbers on this forum, hopefully everyone's budget is the "right" budget for them.

wooops - just saw others posted much the same info already - oh well, here ya go anyway

-ERD50
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Old 11-09-2009, 12:59 PM   #13
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It is the medical/dental insurance costs I need to learn about, big unknowns for my future retirement budget. If anyone feels like tossing me a bone to lead me to a site to start figuring that budget item out I would be quite grateful; I will also do some googling.
~randall
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Old 11-09-2009, 01:09 PM   #14
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Quote:
Originally Posted by randall View Post
It is the medical/dental insurance costs I need to learn about, big unknowns for my future retirement budget. If anyone feels like tossing me a bone to lead me to a site to start figuring that budget item out I would be quite grateful; I will also do some googling.
~randall
Randall:
Welcome.

Try ehealthinsurance.com for health insurance quotes.

Rita
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Old 11-09-2009, 01:43 PM   #15
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Thank you Rita, that site was fast and quick to get some idea on the cost of my health insurance once I retire!
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Old 11-09-2009, 02:43 PM   #16
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Thank you Rita, that site was fast and quick to get some idea on the cost of my health insurance once I retire!
They assume you have no pre-existing conditions, also some (UHC)
give low rates, but increase them after 1st year (20%). Buyer beware.
TJ
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Old 11-09-2009, 03:01 PM   #17
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With your assets, you could easily consider self-insuring (OR perhaps just a very high deductible option) for the 10 yrs until you reached medicare eligibility.
Unless your expecting problems over that period.
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Old 11-09-2009, 03:06 PM   #18
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With your assets, you could easily consider self-insuring (OR perhaps just a very high deductible option) for the 10 yrs until you reached medicare eligibility.
Unless your expecting problems over that period.
I have no health problems, knock on wood. Only a cancer or something like that could hit me hard financially. I actually thought of what you said though-- self insuring, because I heard about someone who does just that, just a couple of days ago on public radio.
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Old 11-09-2009, 03:09 PM   #19
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Compromise, go high deductible. Pay for routine doc visits, etc., out of pocket. But have backup in case something very expensive to fix comes up.
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Old 11-09-2009, 03:20 PM   #20
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The figures that they quote in the "retirement advice" columns nearly caused me to have a "meltdown" when my DH was "early retired" at 62. Those figures are outrageous. Start keeping a spreadsheet and find out how much you actually need to run your household. Is your house "free and clear"? If not, will it be when you are retired?

Health insurance is the biggie before medicare. It is very costly IF you can find it.

Once you have Health insurance nailed down, and you know the rest of your expenses --- THEN you will know how much you need for retirement. After that, figure in your inflation factor and any other unexpected additional costs.

That's how you get your "number".
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