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What percentage of your working income do you spend in retirement?
Old 07-01-2011, 04:01 PM   #1
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What percentage of your working income do you spend in retirement?

I'm not sure if I'm being too optimistic with my predicted decrease in expenses in retirement. Right now, DH and I are pretty aggressively paying off our housing debt. It takes up 40% of our gross. We are saving an addition 25-30% of our gross in retirement accounts (Roth IRA + 457b), and I also have a defined benefits plan.

So I'm thinking it's a pretty conservative estimate that we only need to replace 60% of current income, but every calculator tells me to expect higher.

For those of you already retired, what's the real deal? What percentage of your original working income have you ended up spending on average annually?

Thanks!
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Old 07-01-2011, 04:13 PM   #2
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Originally Posted by KisKis View Post
I'm not sure if I'm being too optimistic with my predicted decrease in expenses in retirement. Right now, DH and I are pretty aggressively paying off our housing debt. It takes up 40% of our gross. We are saving an addition 25-30% of our gross in retirement accounts (Roth IRA + 457b), and I also have a defined benefits plan.

So I'm thinking it's a pretty conservative estimate that we only need to replace 60% of current income, but every calculator tells me to expect higher.

For those of you already retired, what's the real deal? What percentage of your original working income have you ended up spending on average annually?

Thanks!
What you refer to has a name...

they call it your income replacement ratio or your retirement income replacement rate. Google those terms and you can read for months about what others think you should strive for.

Ir really varies by individual and income. If your income is low you may need all of it or more (100% +) in retirement. If you bring in the really big bucks then a small or very small income replacement rate could do the trick. Many on this forum indicate they can get by on perhaps half of their working income. Me personally... I have big dreams and am therefore shooting for a big replacement ratio. It just all depends on what you want and what you are willing to give up for it.

The big "if"s in retirement are medical expenses and housing. If those are covered you are way ahead. So when people post what percent of their former income they spend, you really need to know also how they cover their medical and their housing to make a fair comparison. Also when you compare to other people, make sure that you compare to someone whos income is/was about what yours was.

It all flows from your expenses. Get those down and the replacement rate will be smaller. Then the required nestegg to fund your retirement will also be smaller.
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Old 07-01-2011, 04:42 PM   #3
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What you refer to has a name...

they call it your income replacement ratio or your retirement income replacement rate. Google those terms and you can read for months about what others think you should strive for.
Oh boy, thanks! I'll look into it.
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Old 07-01-2011, 07:03 PM   #4
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Originally Posted by KisKis
I'm not sure if I'm being too optimistic with my predicted decrease in expenses in retirement. Right now, DH and I are pretty aggressively paying off our housing debt. It takes up 40% of our gross. We are saving an addition 25-30% of our gross in retirement accounts (Roth IRA + 457b), and I also have a defined benefits plan.

So I'm thinking it's a pretty conservative estimate that we only need to replace 60% of current income, but every calculator tells me to expect higher.

For those of you already retired, what's the real deal? What percentage of your original working income have you ended up spending on average annually?

Thanks!
I think the right question is really "What percent of my working expenses do I need?," but folks seem to have a better grip on income than expenses.

Any way, we're running on about 60% of the work income. Biggest expense is medical insurance in retirement. Fortunately, we had paid off our mortgage at retirement, so the insurance expense effectively replaced that expense. We're also in a lower tax bracket, and no longer contributing to IRAs, 401ks, etc.
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Old 07-01-2011, 07:22 PM   #5
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Originally Posted by KisKis View Post
I'm not sure if I'm being too optimistic with my predicted decrease in expenses in retirement. Right now, DH and I are pretty aggressively paying off our housing debt. It takes up 40% of our gross. We are saving an addition 25-30% of our gross in retirement accounts (Roth IRA + 457b), and I also have a defined benefits plan.

So I'm thinking it's a pretty conservative estimate that we only need to replace 60% of current income, but every calculator tells me to expect higher.

For those of you already retired, what's the real deal? What percentage of your original working income have you ended up spending on average annually?

Thanks!
If you start with 100% gross and pay housing of 40%, that leaves you with 60%.
If you save 30% of gross, that leaves you now with 30%.
If you pay FICA & Medicare, that leaves you now with 24.35%.
If you pay any income taxes that leaves you now with 15%.

So in retirement, you will not have any of those expenses (mortgage, taxes, and you no longer need to save), so your living expenses will be just like they are now ... about 15% of gross.
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Old 07-01-2011, 08:48 PM   #6
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For those of you already retired, what's the real deal? What percentage of your original working income have you ended up spending on average annually?

Thanks!
I've been retired a bit over four years. In preperation for retirement, I never tried to compute based upon income, but planned on spending the same amount of money as I had before retirement (e.g. based upon expenses).

It has turned out as expected. I've been spending 100% of my pre-retirement net income (adjusted for my personal rate of inflation - e.g. PROI) as various expenses have increased over the last four years.

By concentrating on expenses rather than income, it eliminates all those items you feel you have to adjust for in retirement. I entered retirement debt free, and remain so today.

Overall, my total "gross" has been reduced since my pre-retirement days, since taxes are much less and in addition, I pay no state/local income tax in retirement.

It would have been very difficult to take my pre-retirement gross income, made adjustments for expenses I expected not to be making in the future (such as a note/mortgage), and adjust for future tax rates, based upon my estimated retirement gross income.

This worked for me...
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Old 07-01-2011, 09:31 PM   #7
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If you start with 100% gross and pay housing of 40%, that leaves you with 60%.
If you save 30% of gross, that leaves you now with 30%.
If you pay FICA & Medicare, that leaves you now with 24.35%.
If you pay any income taxes that leaves you now with 15%.

So in retirement, you will not have any of those expenses (mortgage, taxes, and you no longer need to save), so your living expenses will be just like they are now ... about 15% of gross.
That would be fantastic, though our living costs outside of mortgage and taxes are more like 25%. We actually pay amazingly little in taxes. Child credit and the pre-tax contributions help a lot. We have a very low taxable income.

I figure health care costs, which are currently a fully covered benefit, will eat up a chunk, and we'll probably spend more in entertainment/travel. In retirement, I would also like to draw down the 457, which has no minimum age distribution limit, and continue to contribute to Roth until the 457 is depleted.
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Old 07-01-2011, 09:45 PM   #8
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The big "if"s in retirement are medical expenses and housing.
Boy isn't that the truth. Medical is a HUGE question for us. DH was going to take early retirement in 2012 at 55. Now, not knowing what is going to happen with Medicare is a BIG question mark for us. We have been planning his early retirement since he was 24, so we don't want to delay it indefinitely; but we can't walk into it blind either.

We never counted social security in our retirement calculations (we figured if we got it, it would be icing on the cake), but we ALWAYS counted on Medicare.
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Old 07-02-2011, 01:25 AM   #9
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Welcome to the board, Kis.

Quote:
Originally Posted by KisKis View Post
I'm not sure if I'm being too optimistic with my predicted decrease in expenses in retirement.
So I'm thinking it's a pretty conservative estimate that we only need to replace 60% of current income, but every calculator tells me to expect higher.
For those of you already retired, what's the real deal? What percentage of your original working income have you ended up spending on average annually?
You might be realistic, but you're also being misguided.

Working income has little or no relevance to retirement spending. You might as well be trying to compare your lawnmower's gas mileage to your car's gas mileage.

The best way to determine your expenses in retirement is to project your budget. It sounds like you already have a budget for your working lifestyle, so change those categories to suit your retired lifestyle.

You could start with a bare-bones budget (your current budget minus all your working expenses). Keep in mind that your commuting expenses will probably drop and your federal/state/locality taxes will probably also drop. Once you have that retirement budget, see how you're doing for ER with those numbers.

The reality is that your retirement budget might have to add in more categories & expenses for dining, entertainment, & travel. (Assuming those are important to you.) But once you've put together a bare-bones budget, then as you add other spending categories you'll be able to determine how many more months/years you'll be willing to work to save enough to be able to afford the extras.
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Old 07-02-2011, 02:51 AM   #10
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For those of you already retired, what's the real deal? What percentage of your original working income have you ended up spending on average annually?

Thanks!
For me, the percentage of my pre-retirement income was irrelevant because I had twice reduced my pay in the last 7 years I worked, first by nearly 50% then by another 20% (of my original FT pay). So, what would my denominator be?

Instead, to figure out my ER budget, I started with my then-current expenses as a starting point and modified them to fit into a ER budget which did not include working. I eliminated the FICA taxes and commutation expenses and increased my health insurance premiums, all of which pretty much offset each other. There was a downward effect on my remaining income taxes (due to HI being tax-deductible and a smaller ER investment income) and on my general cash expenses (no costly eating out for lunch even 2 or 3 days a week).

I have since lowered my HI expense by switching to a less broad HI plan, reducing my total expenses by 20%.

But my original advice remains - start with your projected expenses from the ground up, not based on x% of your current wage income.
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Old 07-02-2011, 07:48 AM   #11
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Welcome to the board, Kis.


You might be realistic, but you're also being misguided.

Working income has little or no relevance to retirement spending. You might as well be trying to compare your lawnmower's gas mileage to your car's gas mileage.

The best way to determine your expenses in retirement is to project your budget. It sounds like you already have a budget for your working lifestyle, so change those categories to suit your retired lifestyle.

You could start with a bare-bones budget (your current budget minus all your working expenses). Keep in mind that your commuting expenses will probably drop and your federal/state/locality taxes will probably also drop. Once you have that retirement budget, see how you're doing for ER with those numbers.

The reality is that your retirement budget might have to add in more categories & expenses for dining, entertainment, & travel. (Assuming those are important to you.) But once you've put together a bare-bones budget, then as you add other spending categories you'll be able to determine how many more months/years you'll be willing to work to save enough to be able to afford the extras.
There's just no easy answer, is there? I've tried this tack as well, but it is so hard to predict expenses. I have a rough idea how much entertainment would be, plus that is flexible depending on how much we have available, but I am pretty much shooting completely in the dark for healthcare, and that seems to be a major factor. I've been assuming $1,000/month, but that might be too low.
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Old 07-02-2011, 09:36 AM   #12
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Let's be sure of the terms here. Actual spending in retirement (including taxes) divided by pre-retirement gross income.

For us that's about 1/3.
When we had kids at home and a mortgage, we spent a higher percent.

As you've already discovered the 70%-80% rule of the thumb overstates what couples with mortgages and children (that are expected to be gone before retirement) really need to plan for.

Your approach is the only one that I know that seems rational. Record, at least at a high level, your expenses for a period of years. The longer you do it, the more confidence you'll have. Then look at what goes down and what goes up in retirement.
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Old 07-02-2011, 10:31 AM   #13
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IMHO not a good metric as it depends on how long one has been retired. Example: Using current dollars one who "retired" 32 years ago could easily be spending 200% of the final annual pay and allowances received that long ago. IMO expenses are the driving and determining metric.
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Old 07-02-2011, 10:47 AM   #14
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Many of us spent less than half of our gross income even while working. With taxes, SS and medicare contributions, and savings for retirement, that gross income almost seems like a myth that many just never see.

I'd suggest that you begin by estimating your retirement expenses to be about the same as they are while working. Taxes probably will be much less and you won't have to save for retirement any more, so you can adjust the necessary income down accordingly. If your health insurance expenses will be higher, then take that into account too.
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Old 07-02-2011, 11:15 AM   #15
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The easiest work-related expenses for me to track are those withheld from our salary checks, since now, nothing is withheld from our pension checks. Before retirement, 30% was withheld, for FICA, state pension, Medicare, health insurance, parking fee, union dues, federal & state income tax. Now, we have none of those expenses, except we have to pay 15% in estimated federal income tax. So those expenses went down by 15% of our pre-retirement income.
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Old 07-02-2011, 02:29 PM   #16
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Only work expense I see losing is gas & car wear/tear. And I see a lot more on travel. Net, I'm guessing 100% or so. Will find out in nine months.
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Old 07-02-2011, 04:06 PM   #17
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There's just no easy answer, is there? I've tried this tack as well, but it is so hard to predict expenses. I have a rough idea how much entertainment would be, plus that is flexible depending on how much we have available, but I am pretty much shooting completely in the dark for healthcare, and that seems to be a major factor. I've been assuming $1,000/month, but that might be too low.
Well, sooner or later you're going to be retired and having to pay for those things. Might as well get educated on the market now so that you have a flatter learning curve later, and so that you can more easily tell the bargains from the scams.

I'm far from an expert on health insurance, but eHealthInsurance.com gets good press here. HSAs are one way for some to reduce health insurance costs. Other posters will soon chime in with other health-insurance-related websites.

In addition to cutting out your work-related expenses you could also check the "How much did you spend?" threads for inspiration:
http://www.early-retirement.org/foru...archid=1740037

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Only work expense I see losing is gas & car wear/tear. And I see a lot more on travel. Net, I'm guessing 100% or so. Will find out in nine months.
Childcare/after-school
Pet care
Yard care
House cleaner
Convenience foods (you're cooking more meals at home)
Uniforms (or office attire, for example shoes & socks in my case)
Running shoes
Office meals (being expected to go out with the group)
Parking expenses
Sodas & snacks (vending machine impulse purchases)
Donations to various fundraisers or work-related social events
Bicycle tires & tubes

For some, blood-pressure & cholestorol medication...

Travel: depends on how you do it. If you take bargain airfares and "live local" like the Kaderlis or the Terhorsts then it's a lot cheaper than vacations during your working years.
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Old 07-02-2011, 08:39 PM   #18
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Let's be sure of the terms here. Actual spending in retirement (including taxes) divided by pre-retirement gross income.

For us that's about 1/3.
When we had kids at home and a mortgage, we spent a higher percent.

As you've already discovered the 70%-80% rule of the thumb overstates what couples with mortgages and children (that are expected to be gone before retirement) really need to plan for.

Your approach is the only one that I know that seems rational. Record, at least at a high level, your expenses for a period of years. The longer you do it, the more confidence you'll have. Then look at what goes down and what goes up in retirement.
Perhaps, not everyone is as highly compensated as you were.

For lower income people a 70-80 % income replacement ratio may fit the bill exactly. People in that situation would really struggle at 33% as you suggest.

These rules of thumb don't work very well for all classes of people.
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Old 07-02-2011, 08:42 PM   #19
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Boy isn't that the truth. Medical is a HUGE question for us. DH was going to take early retirement in 2012 at 55. Now, not knowing what is going to happen with Medicare is a BIG question mark for us. We have been planning his early retirement since he was 24, so we don't want to delay it indefinitely; but we can't walk into it blind either.

We never counted social security in our retirement calculations (we figured if we got it, it would be icing on the cake), but we ALWAYS counted on Medicare.
yet if you have Medical covered from say... A government career, or a very generous Mega-Corp position, it may be a non issue.

So to compare someone in that situation with someone like yourself that needs to cover the medical is truly an unfair comparison. How does their income replacement ratio relate to yours ?

Per the Medicare thing, it will be around in some form or another. You will receive some sort of benefit. perhaps you'll pay somewhat more and get a little less, but it will still be around.
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Old 07-02-2011, 08:50 PM   #20
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IMHO not a good metric as it depends on how long one has been retired. Example: Using current dollars one who "retired" 32 years ago could easily be spending 200% of the final annual pay and allowances received that long ago. IMO expenses are the driving and determining metric.
I assume the calculation is done in real dollars not nominal dollars. Adjust everything for inflation to make sense of the statistic.
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