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What % of income does one need to retire?
Old 01-27-2012, 09:08 AM   #1
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What % of income does one need to retire?

I know that this topic has been extensively discussed and the usual answer is either "70% or so of pre-retirement income" or " varies from person to person, calculate your expenses". But on the 70% rule, surely there is a maximum amount beyond which it is a diminishing % as income raises, no? At the extreme, surely Bill Gates and Warren Buffett do not need 70% of their current income in order to retire?
Has there been any more formal thinking around this diminishing % concept? Ideas?
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Old 01-27-2012, 09:10 AM   #2
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You're right it has been discussed here many times, have you tried search?

Though the last thread recently on that subject went in circles from post #1.
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Old 01-27-2012, 09:17 AM   #3
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You can't get around it, you need to track your current expenses and project to get a reliable answer. I was saving nearly half my income when I was working. Do I need 70% of my former income to live in retirement?

I think not.
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Old 01-27-2012, 09:25 AM   #4
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How much you earn has zero to do with how much retirement income you need. It has everything to do with how much SPENDING you plan on doing in retirement; calculating spending need based based on your earnings is ass-backwards..
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Old 01-27-2012, 09:27 AM   #5
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I'll write what I have written before on this topic.

You start from the ground up (i.e. calculate expenses in retirement), not from the top down (i.e. percent of wage income in retirement).

In my own case, I twice reduced my salary in the 8 years before I ERed 3 years ago. The first time I reduced it by nearly 50%. The second time was another 20% (of my original full-time pay). So, using the "% of pre-retirement income" axiom, which level of pre-retirement income should I have used, my original FT pay, my ~50% PT level, or my ~33% PT level? In my budgeting for ER, I started with my final PT-working expenses and adjusted THAT for ER (mainly by eliminating commutation and FICA while increasing my health insurance).
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Old 01-27-2012, 09:59 AM   #6
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The percentage question is just a tease that financial porn vendors like Money magazine toss out there to get their stuff sold. It's so people who are never going to go to the trouble of figuring out what income they would need in retirement can have some kind of fantasy to hold on to.

Early retirement is way too individualized to slap some kind of BS fits-all-number on and go on with your life. Some people here retired at 62 and think that was early, while others want to leave work in their thirties. It's all going to be different depending on your circumstances. I retired at 45 with kids in school and my spending hasn't gone done a bit in retirement - I just spend it differently now.
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Old 01-27-2012, 10:08 AM   #7
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Quote:
Originally Posted by farmerEd View Post
How much you earn has zero to do with how much retirement income you need. It has everything to do with how much SPENDING you plan on doing in retirement; calculating spending need based based on your earnings is ass-backwards..
Or bass-ackwards...

Coincidentally, Fido, which holds my retirement accounts, occasionally calls, trying to "help" me, though so far no one has tried to sell me a variable annuity. Spoke for a few minutes with some young fellow last night, discussing my "retirement plan". He was using 85% of current pay. I told him, sure, use that, but that it was worthless to discuss whether an amount was "enough" without knowing retirement expenses and/or wants.

The good news is that he agrees I can probably FIRE at 62. Glad for the confirmation, even if it's more smoke than flame...
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Old 01-27-2012, 10:39 AM   #8
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First post with this topic. Is this a troll?
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Old 01-27-2012, 10:45 AM   #9
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How much you earn has zero to do with how much retirement income you need. It has everything to do with how much SPENDING you plan on doing in retirement; calculating spending need based based on your earnings is ass-backwards..
+1 The 70% or 80% rule of thumb might be appropriate for someone who is living paycheck to paycheck because their net take home pay is only 70-80% of their gross, but key number is what you need to live your current or desired lifestyle in retirement.
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Old 01-27-2012, 10:53 AM   #10
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Originally Posted by boatfishandnature View Post
At the extreme, surely Bill Gates and Warren Buffett do not need 70% of their current income in order to retire?
So how much do Gates and Buffett make in income? Most of their net worth is probably from capital gains anyway. They may be spending way more than their W-2 income. They may need 200% of their pre-retirement income in retirement. Again, their spending has nothing to do with income.
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Old 01-27-2012, 10:59 AM   #11
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Originally Posted by boatfishandnature View Post
I know that this topic has been extensively discussed...
"Extensively discussed"? I'd say it has been beaten to death an exposed as a total fallacy. Trying to use some rule of thumb on what % of income is needed in retirement makes about as much sense as trying to determine the distance from the earth to the moon using a measuring cup.


Quote:
Originally Posted by boatfishandnature View Post
..."varies from person to person, calculate your expenses".
This is the only reasonable answer.
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Old 01-27-2012, 11:38 AM   #12
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If you have a boat you probably need 110%.
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Old 01-27-2012, 11:45 AM   #13
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If you have a boat you probably need 110%.
True dat. Sold mine before I retired.
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Old 01-27-2012, 12:21 PM   #14
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Hi boatfishandnature, welcome to the forum. Yes, this topic has been discussed before, as the other members have pointed out, but in a different context - the US, or another developed economy. I see in your profile you are in Brazil, and I suspect these rules of thumb do not apply to you. My Brazilian friends that retired in the past 10 years or so are all receiving pensions greater than the salaries they had when they retired, and there is no reason to believe the next decade or two will be different. If you retire in Brazil, I would think you have two challenges. How to project future spending needs in a developing economy, and then how to allocate your assets so your spending needs are covered without excessive risk.

As the others have pointed out, however, you do need to shift your focus from income levels to spending needs as a first step.
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Old 01-27-2012, 01:12 PM   #15
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Thanks everyone, great insights. One always feels worried about a first post, especially when launching a topic has a lot of detractors ( Midpack, I had done a search and had read the FAQs before asking, so knew the majority view that projected expenses are what matter ). I guess I don't believe that projected expenses/needs and income available are totally independent variables... many decades ago when I was a student I could not save but was reasonably happy with my very modest lifestyle. For the past several years I have been saving a substantial portion of my income and am happy with mine and DW's comfortable but not extravagant lifestyle... but it is a very different lifestyle from the student days! I think the point is that for most people one's income bracket does influence what types of expenditures one puts into the category of "musts", "wants" and "not for us, I am not interested and won't even think about it"

And unfortunately for our financial health, I do have a boat and love boating and fishing... would hate having to give that luxury up in ER, so have delayed ER a bit (I am 56 ) to try to secure that aspect. I do see boating expenses as a the first luxury to go if someting had to go. Since ER is now nearing, I was just curious to see if any of the studies that led to the 85% or 70% or whatever rule had made an allowance for a lower % as disposable income goes up.

MichaelB, you are absolutely right, forecasting expense patterns in a higher inflation environment is a real challenge...
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Old 01-27-2012, 01:40 PM   #16
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I did not grasp your specific question first time through, sorry (likely because the last thread on replacement % wasn't very "enlightening"). Though I don't think these averages are of much use, and aren't intended to be more than a rule of thumb, here you go http://www.aon.com/about-aon/intelle...tudy070308.pdf

I gather you're asking about higher income levels, in which case you'd have to extrapolate from here and adjust for Soc Sec, pensions, etc. - so it would just be easier and more accurate to project your actual expenses and plan for same regardless of your income. The chart below is from an earlier Aon report, and there's considerably more in the pdf above...
Attached Images
File Type: jpg replacement-ratio.jpg (18.0 KB, 12 views)
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Old 01-27-2012, 01:41 PM   #17
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Originally Posted by boatfishandnature View Post
Since ER is now nearing, I was just curious to see if any of the studies that led to the 85% or 70% or whatever rule had made an allowance for a lower % as disposable income goes up.
I am not aware of any studies on the subject. However, I see no reason why a lower % should necessarily apply when disposable income goes up. What matters is: Do you live below your means, and if so, how far below your means?

For example, someone might make a $1M a year and be used to live high on the hog. He may need 70-85% of his pre-retirement income to sustain that lifestyle in retirement.

On the other hand, someone might make $100K a year and live only on $40K. That person will be OK with a much lower replacement rate.
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Old 01-27-2012, 02:19 PM   #18
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boatfishandnature - I've found with talking with those that have not thought much or studdied retirement funding or FI that 70-80 can be a usefull talking point. It has to be preceeded with a warning that it is personal, varies case by case, and all, but sometimes people need to just start thinking and to say sit down and figure your expenses 30 years from now will just piss em off and they don't listen any more.

My boys are like this, late 20s, and we talk about finances and retirement quite often. However, when we start talking too detailed eyes start to gloss over and soon they are back watching the game on tv. For them, I can give standard warnings, but say it can be about 70-80%.

However, by the time your ready to get serious about planning for retirement, you gotta put a plan together that incudes a retirement budget.

On first blush, you would that your idea about not needed as much % as you earn more would be worth a discussion, but then remember most of those that make more than you are just broke in a higher income bracket. That is not always true but often enough. So if that is often true, and most have debt they can't pay off now, they would need $$ in retirement to continue to pay it off. No ?
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Old 01-27-2012, 02:33 PM   #19
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Thank you for sharing, Midpack, really interesting study - it is good to understand the assumptions behind some of those rules-of-thumb
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Old 01-28-2012, 12:04 PM   #20
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So how much do Gates and Buffett make in income?
Buffett's income has become too politicized to get a good Google search.

I know it's $100K/year salary (plus expense reimbursements of ~$350K). I thought I'd read that in 2009 or 2010 he had $47M of dividend income from his personal portfolio, but I can't find that link.

I think any income that Buffett got from cap gains was due to his trading activity, not a 4% SWR.

He released some tax numbers last October:
What Did Warren Buffett Really Earn? - Total Return - WSJ
... but that doesn't break it down very well.
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