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Old 03-08-2012, 09:17 AM   #21
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You might "need" less income, but you might want to spend more than you were spending before retiring...
Heh heh heh... Can we say "pent up demand"?

A retiree will need to remind himself "Control yourself, grasshopper!". Heh heh heh...
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Old 03-08-2012, 10:24 AM   #22
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Heh heh heh... Can we say "pent up demand"?

A retiree will need to remind himself "Control yourself, grasshopper!". Heh heh heh...
Pent-up demand is a great way to describe it!
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Old 03-08-2012, 01:18 PM   #23
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My expenses did not go down in retirement.
+1

Neither have mine. I agree completely that you have to study your own circumstances to determine if your spending in retirement will be more or less than your spending while employed.

Projecting your financial needs in retirement is not a good time to use "rules of thumb" or other shortcuts.
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Old 03-08-2012, 01:33 PM   #24
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+1

Projecting your financial needs in retirement is not a good time to use "rules of thumb" or other shortcuts.
+1. When I ER I'll have to spend $300/month more on health insurance, but I'll save $200/month on commuting. My taxes will go down, but my day to day expenses will stay the same. I'll ride my bike a lot more and see more movies, but I pay for annual pass now anyway so that won't cost any more and I plan to take similar vacations. So I'll be spending what I spend now, which is around 30% of my current gross income.
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Old 03-08-2012, 03:22 PM   #25
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I've read in various articles that most people need only a percentage of their current income when they reach retirement age. For example, if a person's expenses amount to $30K a year, they only need 80% of it in their senior years (do not recall the exact figure).

That seems counterintuitive - with medical expenses, it seems you would need much more when you retire.

How do people figure LESS (rather than more) is needed in retirement age, it seems it would be the opposite.
You are correct that medical would increase. However, there are many things that will decrease. Below are three biggies, I'll spare you all the smaller ones.

1) Savings no longer needed - we save 30% of our GROSS
2) Taxes - this is a HUGE one for us. Our gross needs will go down by nearly $40,000 simply by retiring! That's right, we will pay about $40,000 less in federal taxes after retirement than we do today...because we live in much less than we make...so will require much lower income at that time. Note this does not include FICA and state, which will also decrease
3) Mortgage will be paid off. At $1,900/month, that's about $23k/year less we'll need
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Old 03-08-2012, 04:22 PM   #26
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Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?
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Old 03-08-2012, 04:40 PM   #27
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Originally Posted by Danmar
Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?
Either way seems perfectly valid to me, as long as one takes taxes into account one way or the other. .
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Old 03-08-2012, 04:56 PM   #28
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My problem is that I can retire in January on what I bring home (net) now. However, the amount I currently net is AFTER my max 401k contributions of $1875 per month. The 401k isn't going to provide more than about $500 per month @ 4% SWR, so....still trying to decide what to do. Wife works for 3 more years but her income will pay for 100% max to her 401k, so won't be available as income for awhile, and my reserves retirement doesn't kick in until 2018.
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Old 03-08-2012, 05:04 PM   #29
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Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?
Income taxes are lower because of lower income, but while working one also has to pay FICA and Medicare which are taxes only on earned income, so those 2 taxes of ~7.5% disappear altogether on pensions, annuities, interest etc. I consider those to be a genuine expense reduction, as well as lower property taxes if you downsize (as we did).
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Old 03-08-2012, 05:04 PM   #30
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Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?
I split my income taxes into two parts. The first is the income taxes on my "expected" dividend income which I consider an expense. The second is the income taxes on my irregular, cap gains distribution income which I do not worry about covering because the taxes I pay on it come directly or indirectly from the said distribution(s). This falls into your "offset" description.
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Old 03-08-2012, 05:22 PM   #31
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Interesting. Every year I get a rather large tax refund representing the difference between taxes owing on dividends and interest and my large deduction for alimony, as well as charitable donations. My pension income is paid net of taxes. I include this refund in income and can easily forecast what it will be. I agree property taxes are a straight expense. We don't have taxes like the ones you mentioned that are only payable from active income here in Canada.
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Old 03-08-2012, 05:38 PM   #32
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...Otherwise your largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?
+1, although my taxes are not my largest expenses.

I do include real estate and vehicle taxes however, because these reflect the lifestyle that I chose. If one chooses to have a 2nd home or multiple cars, wouldn't he count maintenance, fire insurance, various operating costs as expenses? Taxes on these assets should be treated the same way.

By the way, I do not bother to count or even think of RE values in my networth however. For that, I count only liquid assets, something that I could convert to good cold cash or Krugerrands with a click of a mouse. If I have rental properties, I would of course think differently as they are income-generating assets, not "sunk costs" that houses now are.
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Old 03-08-2012, 08:37 PM   #33
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Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?
earlier in retirement i started looked at income taxes the way you say here. i did so because i was receiving income from some hard money lending i did. the return was high so the income taxes would have consumed my entire SWR if i had looked at taxes as an expense. i still look at income taxes that way.
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Old 03-08-2012, 09:07 PM   #34
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I figure my expenses will be about the same overall. I will not be contributing to retirement accounts and SS, which will eliminate one drain on spendible funds.
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Old 03-08-2012, 09:49 PM   #35
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That was dreamed up by some 30 something journalist writing some financial porn for people who want easy answers.
This could be another urban legend, but when I was researching the book I read that the "80%" canard was based on a 1980s study of "work-related expenses". The (unspecified researchers) determined that commuting expenses, business attire, drycleaning, professional equipment, association memberships, childcare, 401(k) contributions, and so forth added up to about 20% of gross income.

Mods, as much fun as it is for every new poster to rediscover this issue, do we have some sort of in-your-face FAQ that they can easily find that will help them avoid asking this question in the first place?
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Old 03-08-2012, 10:08 PM   #36
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Several points touched on so far:

RE: OP's original question - stated elsewhere in the forum, our expenses are significantly higher in retirement than when w*rking. Primarily, our choice of place to live (plus travel increases) have led to this situation.

RE: Danmar's way of looking at taxes - I've chosen to look at taxes as an expense because taxes ARE (to some extent) manageable. Also, tax rates are not guaranteed, so may be higher in the future (meaning, more planning for that potential expense NOW).

Finally, the OP needs to be aware of the tax implications of having tax deferred money in retirement funds. Managing these funds is important to limit the tax impact.
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Old 03-09-2012, 10:32 AM   #37
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FWIW, here's a current article on the subject of retirement expenses:

Living to 100? That Will Be $3.5M - SmartMoney.com
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Old 03-09-2012, 12:49 PM   #38
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Mods, as much fun as it is for every new poster to rediscover this issue, do we have some sort of in-your-face FAQ that they can easily find that will help them avoid asking this question in the first place?
Second the motion.
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Old 03-09-2012, 01:16 PM   #39
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While YMMV, I found that a LOT of expenses went away:
FICA and other employment taxes for one,
Because we don't work we found that:
- We could move to 'pay as you go' cell phones
- Moved from ATT to Vonage
- A LOT less $$ in suits, shoes and other clothing...
- Commuting expenses (gas) went to 10% of our work time

More importantly we found that our TIME was a CURRENCY in that we save thousands of dollars ($5-10K) a year in doing things that we used to pay other people to do that we didn't have the time for.
-Painting
-Yard maint
-Snow removal
-Minor plumbing/elec work
-Car maint

We also had the time to buckle down and learn a lot about our finances and...
1) dumped our financial advisor (1% of our portfolio)
2) dumped our tax guy...hello TurboTax, good bye $800 tax prep

In short, while we were working we solved a lot of 'problems' with our checkbook...now we have more time than money.
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Old 03-09-2012, 01:25 PM   #40
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FWIW, here's a current article on the subject of retirement expenses:

Living to 100? That Will Be $3.5M - SmartMoney.com
According to the article:

Once you reach 50 - you've already spent $1.5M
From 50 to 80 - $1.4M
Hey - from 81 to 100 - $630K

So that "extra longevity" only costs $630K.

Thanks for the link. Interesting listing of expenses by age decade. I wish they had given annual totals for each decade - the 90s lists several possible sets of expenses which wouldn't be concurrent - or maybe I'm wrong. It's a bit confusing.

Audrey
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