When you retire, you need less income than before to survive?

[tgc641]

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.

 

[Alan]

Welcome to the site.

Why not introduce yourself here and tell us a little about yourself.

Hi, I am... - Early Retirement & Financial Independence Community

 

[W2R]

Welcome, tgc641.

As for your question...

You aren't saving for retirement any more.
You aren't paying FICA any more.
You don't have to pay for gas to commute to work.
Taxes are lower.

These can be some of the big sources of savings.

There are also expenses in retirement that can be greater than beforehand, depending on what you want to do in retirement. I knew that I'd want to spend more on entertainment. Other members here often enjoy a lot of travel which can be expensive.

I'd suggest starting with your present spending, thinking about it, and adding and subtracting to form your estimates in the ways that make sense to you.

 

[FreeAtLast]

Just to add a few things that W2R pointed out.

The mortgage should be paid off around retirement time.
The expenses of raising a family are gone.
No need for term life insurance
Possibly only one car is required.
You don't need to live in an expensive location where the jobs are.



Welcome!

 

[Leonidas]

Not all retirement looks the same. And in the case of early retirement it can be significantly different. I retired at 45 with young kids still at home, a mortgage, my vehicle fleet has more than doubled in size (plus I lost the company car), college tuition bills come in regularly, etc.

My expenses did not go down in retirement.

The answer is that there is no coefficient of income that you multiply by to get an answer. That was dreamed up by some 30 something journalist writing some financial porn for people who want easy answers. The real answer is that you have to determine how much you need to fund your retired life. The longer you plan to be retired, the more stuff you want/need to do in retirement, the more money you will need. Some people decide to work longer to have more to spend in retirement while others decided to live more frugally in a longer retirement.

 

[devans0]

You can have more time to enjoy cooking rather than eating out 'cause your late to/from work, or more time to repair around the house rather than hiring it done.
Come to think of it, these end up costing more...nevermind.

 

[obgyn65]

I am not FIREd yet but when it happens I plan to spend more on travels, and spend much less on taxes. However, my major "savings" will be that I don't have to save money anymore when I stop w*rking...

How do people figure LESS (rather than more) is needed in retirement age, it seems it would be the opposite.

 

[chris2008]

I do not trust in such "one size fits all" estimations.

If in your work life you try to keep up with colleagues by buying latest stuff, eat out a lot or bring take out food for all the family, retirement might enable you to reduce a lot of that and thus cut costs. In addition the saving for retirement funds goes away.

But if you are already LBYM retirement might not cut expenses significantly. In our case, the saving for retirement will be replaced by increased travelling as long as health allows and by cost of our car, to replace the free company car.

Detailed tracking of current expenses will allow a much more educated forecast than the 80% rule of thumb.

 

[seraphim]

I created a detailed spreadsheet for budgeting, which allowed me to take a good look at where money was going, and planned assets; tracking and modifying gave me a good look at where we'll be come January. When interest rates on one of my major accounts dropped drastically last week, the spreadsheet let me see instantly the effect of the rate drop.

You have to look at your own expenses to decide. I think that formula you quote is suggesting, to maintain the same lifestyle, you only need 80% of your previous gross income, because you'll be losing certain expenditures and adding none. *shrug* Could be you'll have to decrease your standard of living a bit.

We're getting rid of $30,000 a year college payments - $2500 a month. We need a lot less to maintain our current lifestyle. But we intend on improving it lol.

Welcome to the group. I'm new here myself, but have found this forum contains a lot of experienced people.

 

[nun]

To early retire you have to be able to save a large portion of your income, 20, 30, 40 or even 50%. So many people on here already live on a small percentage of their income. Then take off all the retirement savings like no mortgage etc and you can get down to really small numbers. I'm looking at needing 30% of my gross income in retirement. Medical costs might go up, that obviously depends on your insurance policy and health, but your retirement plan should account for that increased cost.

 

[gerntz]

We will have higher after tax expenses. Only thing I save is commuting expense. But I'll have 60 hours more per week to spend. A big part of that for several years will be travel. Way more cost than commuting.

Now if I have enough money to last to 110, will I need as much income? Well no. But then if having enough to last thru retirement was my goal of working, I didn't need ot be working.

Something else. Our medical insurance costs will increase in retirement.

 

[rescueme]

I live on 100% of my pre-retirement net income in retirement, adjusted annually for my PROI (personal rate of inflation). I don't feel I'll spend any less, since as I age medical expenses will increase along with the purchase of "services" (such as lawncare) which I do myself while in my mid 60's. BTW, I've been retired five years (DW will do so the end of this month) and my expenses have not gone down. OTOH, there have not been any great increase due to retirement. Our biggest expense has been travel over the last 15-20 years, and remains the biggest expense. We had no need to add to our retirement expense budget due to "delayed desires".

Any forecast/matching against gross income ignores all the variations related to taxes, retirement contributions, etc.

It's an easy way for investment companies to come up with a rough estimate of what you may need to save due to the fact that (IMHO) most folks in their accumulation years do a poor job of budget/expense tracking and can't use actual numbers in their calculations.

Just my $.02.

 

[pb4uski]

It depends on one's situation. The "80%" that you frequently hear quoted and other rules of thumb commonly assume that you spend your entire take home check, which may be valid for most people, but is definitely not valid for many on these boards.

The best thing to do is to analyze what you spent for the two years before retirement and then make adjustments to that spending for things you think will change.

For us, I think our spending will be about the same as it was prior to retirement (after adjusting for now having only one house rather than two houses).

 

[donheff]

Tons of threads around here on the idiocy of the 80% mime. The reality is that if you are working toward ER you are spending far less than you are earning. Calculate your expenses - then evaluate what it will take to generate enough money to cover those expenses in the context of no FICA, lower income taxes, no savings. Generally this amount is far below 80% of pre-retirement income.

 

[scrabbler1]

When I was planning my early retirement in 2008 at age 45, I never looked at my current income as part of that plan because it was irrelevant (and had decreased twice in the last 8 years prior to my ER). Only my expenses mattered.

Similar to what others have mentioned, when I stopped working, my commutation expenses and FICA taxes disappeared, while my medical expenses (insurance and OOP dental) rose. My goal was to have those items roughly cancel each other out, and they did. My income taxes dropped a little while my day-to-day cash expenses stayed about the same.

Bottom line - calculate your expenses from the ground up, not from an arbitrary income level down.

 

[Tree-dweller]

That was dreamed up by some 30 something journalist writing some financial porn for people who want easy answers.

Yup, I used to like to ogle figures. Now I like to ogle figures.

 

[audreyh1]

You might "need" less income, but you might want to spend more then you were spending before retiring - especially if you were doing a lot of saving like we were: too busy working to spend much, and putting large chunks away to invest/save.

We spend more post-retirement than we did pre-retirement. When you are retired, you have the time to spend money on things you want to do. Things like travel can cost quite a bit, if that's what you fancy.

I'm sure we are not alone in how our spending changed after retiring. So you must look at what you want to do/spend after retiring.

Audrey

 

[Danmar]

great responses. Not much to add other than to agree that one size certainly does not fit all. Also it's expenses that count and you should not start with income as the base to determine how much you need in retirement. For what it's worth in our case we are spending about 30% more than before.

 

[Alan]

great responses. Not much to add other than to agree that one size certainly does not fit all. Also it's expenses that count and you should not start with income as the base to determine how much you need in retirement. For what it's worth in our case we are spending about 30% more than before.

+1

Our spending is also up ~30% / year caused by doing a lot more of the things we didn't have time for while working.

 

[Danmar]

+1

Our spending is also up ~30% / year caused by doing a lot more of the things we didn't have time for while working.

For sure. We are spending more on travel, entertainment, and house expenses(bought two more places) , as well as auto expenses ( have more cars at the new places). We never included savings as an expense category, so reductions have been minimal and relate to work type expenses.

 

[NW-Bound]

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...

 

[audreyh1]

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!

 

[youbet]

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.

 

[nun]

+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.

 

[Finance Dave]

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