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Retirement income as a percentage of NET working income?
Old 07-13-2017, 07:21 AM   #1
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Retirement income as a percentage of NET working income?

FI is of course, dependent on WHAT amount of income one defines as enough, and then the ability for that income to be generated without w*ork required. Naturally, this forum has huge extremes of what constitutes FI. Multimillionaires, life long pensioners, real estate moguls etc, etc. Some FIREd when there was the opportunity to sell home and move from high COL, to simpler less expensive COL, others stayed put when income without work allowed them to. My own personal definition is basically the later, I look at (and have for many years) what my net spendable income that covers everything I do and want to do on a "reasonable, as defined by me, basis" . Like many here that number goes up with life, but plans to drop when all debt (mortgage, mainly) goes away. My mortgage is at such a low rate and small amount that I could pay it off anytime, but then it just becomes a game of earnings and fungiblity. It goes away on its own in 5 years regardless.

Typically, I increased my savings, both long and short term as raises occur, and opportunities existed. I am FI currently at 59 1/2, which was my goal, without being overly frugal. Not wealthy by typical definitions but certainly already a guaranteed income for life well above what my parents ever had or the average Joe Retiree I know. Say around $110k/yr if I withdraw from savings what is equal to what my (maxed out over 35 years income) SS would be, with adequate savings remaing once SS starts at FRA. My interim health insurance is not an issue for me as it is covered by work as a retiree along with a pension. DW is already 65, has her own pension and collecting SS.

But I also know many Joe Verycomfortable retirees and see that as a better goal for my self, so I have not REd. Literally, I do not want to change my lifestyle or be concerned about spending money on whatever. One home is fine. Enough so that I could self fund a reasonable term of LTC. That means age 61 or 62, to bring the income level up closer to $140k, due to increased pension benefit, less withdrawal time, increased growth/appreciation and savings. All typical stuff discussed here all the time. My job pays low six, is low stress, easy short commute, no clock to punch, good friends and associates. Good satisfaction. No health issues.

So, if possible to remember, would you say that you REd when you figured your retirement net (after lower taxes, assume no additions to savings, no SS or Med deductions, etc) income was above, equal, or below your net working income, and if above or below, roughly what percentage or how much? Mine will be above my current working net by about 20%, as only our SS is COLA, neither of our pensions are. I am concerned if inflation should return and that the long term 7-8% returns of the market drop over time (vs the above average returns of the last few years of this bull) making a typical 4% SWR unreasonable. So I want to add to savings some until inflation erodes that. Leaving a large amount to heirs is unimportant.

If below, I can assume you modified your lifestyle to be less than what it was when working. If equal. The same. If above, you love the money or wanted a bigger hedge. I do not know how to make this a poll, or I would.
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Old 07-13-2017, 07:28 AM   #2
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I shot for "about equal". If anything, I think I may have more than that, because it just worked out that few things that I couldn't count on falling into place, fell into place at just the right time. Blind dumb luck in other words. But 5 years prior to retirement, I could not have counted on them falling into place.
Also, I should mention, that while I am retired, I would not consider my retirement "early" as I worked until 62. DW retired "early" at 59 1/2.
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Old 07-13-2017, 07:30 AM   #3
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Originally Posted by Perryinva View Post
...
So, if possible to remember, would you say that you REd when you figured your net income was above, equal, or below your net working income, and if above or below, roughly what percentage or how much?

If below, I can assume you modified your lifestyle to be less than what it was when working. If equal. The same. If above, you love the money or wanted a bigger hedge. I do not know haow to make this a poll, or I would.
To borrow your second line: Naturally, this forum has huge extremes of what constitutes FI. You are going to get a range of interesting responses, none of which will provide much/any guidance to many others!

"net income" will be next to meaningless for DW and I in retirement--it all will depend upon what we want to spend in a given year and which type of account we withdraw from. Withdrawal rate/spending is what I'll answer with.

Our net spending in retirement will be more than our after-tax spending while working (post-kids). That net spending/withdrawal will be considerably less than our Gross working income less taxes, and less than half our usual taxable income.
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Old 07-13-2017, 07:51 AM   #4
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When I retired at 49 I did not consider FI as being able to replace my NET working Income. We were super savers (LBYM) because we only require 25% of our last year of w*rk salary to maintain our standard of living. Our house was paid off as well. When we were paying almost 2X in taxes then what we needed to maintain our standard of living I knew it was time to quit and enjoy the freedom. We assume no SS benefits so we do plan to spend down our nest egg over the next 44 years so our investment income (dividend) will not fully cover our "plan" expenses.
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Old 07-13-2017, 07:55 AM   #5
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I will bite. My retirement spend is about 20-25% of my pre retirement Gross income. (it is actually less then my former annual Fed income tax) When you filter out Savings, Housing, Taxes, College Tuitions etc. My retirement spend is almost identical to my working years spend, lifestyle is about the same with some increase in recreational spend and a corresponding decrease in work related spending. I really did not start saving until I was about 45. Retired at 56.
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Old 07-13-2017, 07:56 AM   #6
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I would say equal to my net salary, without bonuses. From my salary I paid large amounts of taxes, health insurance premiums, and 401(k) contributions; and I always banked bonuses.

So my RE budget is essentially the same as my old bi-weekly take home pay.
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Old 07-13-2017, 07:59 AM   #7
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I am doing it differently. It depends on how you define "net income" before retirement.

I define "net income" as income after all taxes (state, local, SS) are taken out.

From that amount, some of that is spent, some of that is saved/invested.

I looked at our spending over the last 10 year and 5 year time timeframes (easy to do since we track expenses with quicken) to get an average spending amount.

I then adjusted that spending amount based on items that are going to be reduced or eliminated (like kids college expenses) or that will increase (like health insurance premiums).

For taxes, I used a tax program to model my expected post-retirement income to get an estimate of what taxes would be.

So I used the adjusting spending plus the estimated taxes to estimate what my planned expenses would be. I then used that in programs like FireCalc to determine the required retirement "income" (from pension, investments, or cash withdrawals) to provide a high success rate.

So I look at what my expenses are first, before determining what the associated "income" requirement would be.
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Old 07-13-2017, 09:01 AM   #8
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Not counting income taxes, we expect to spend about 10% more than we did pre-ER. Higher spend on travel, entertainment and healthcare, partly offset by savings on clothing, dry cleaning, and commuting costs. After factoring in taxes, it should be lower spending but we have only been ER'd for 8 months so TBD.
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Old 07-13-2017, 09:27 AM   #9
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I figures that I would need about 35% of my working salary to live the same lifestyle in retirement.

Comparing a $100K salary, you can deduct
Salary$100,000
-FICA/Mcare($7,650)
Less 401K($24,000)
Mortgage P&I($16,836)
Tax Savings($15,000)
  
Annual Total$36,514
Monthly Total$3,042.83
Salary Equiv %36.51%
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Old 07-13-2017, 09:29 AM   #10
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My retirement income is probably 80% of my pre-retirement income. Any raise or bonus went to savings. The only difference is I dialed down what was a great deal of spending on charities and wine/restaurants.
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Old 07-13-2017, 09:31 AM   #11
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I'm glad you brought up this topic. I've been meaning to make a similar post. The response to every RE query is always, "You need to know what you are going to spend in retirement." I don't disagree with that, but it can be hard or impossible to answer. I've always assumed that if my NET retirement income was equal to my NET working income, then things will be fine. I'm not sure where the breaking point is (90%, 80%, 70%)?? And that will likely be closely tied to the specific situation. For example, you are accounting for the fact that your pension is not COLA. The numbers might change drastically for some one who does have COLA pension.

Your logic seems well thought out to me. The only thing that stood out to me was your "lower taxes" statement. If your NET working and retirement income are within 20% of each other, then I would assume the GROSS incomes are at least in the same ball park. Won't you likely be in the same tax bracket (or similar) pre and post retirement?
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Old 07-13-2017, 09:33 AM   #12
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Retirement spend for us is about 35% of pre retirement income. It's much harder to define post retirement income since the only "paycheck like" sources of income are SS and a tiny pension. Considering that our withdrawal rate is in the range of 2% of liquid NW I suppose I could call that "income" as well but we could just as easily make it 3 or 4%.
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Old 07-13-2017, 09:35 AM   #13
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Current spending is about 50% of take-home income. Been saving the other 50% for 30+ years.

Planned retirement spend is that same $$ amount, which equates to about 3.5% WR for first 4-7yrs until SS (not sure when I'll start), then 2-2.5% WR.

This has become mathematically feasible in the last 1-2 years - holding out for 13 more months for retiree healthcare subsidy.
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Old 07-13-2017, 10:07 AM   #14
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I have more to spend in retirement than I did while working.

WORKING: I saved literally every spare penny of my five figure salary while working, because I wanted to become FI as soon as possible. Then when that happened, I continued to work until I qualified for retiree medical coverage.

While working during those FI years I continued to save at the same rate, because, well, why not. Every year I maxed out my TSP (=401K) contributions and my Roth IRA, and tried to put more than both combined into taxable investments since my home and all other debt was paid off by then. I didn't have much left over to spend, but I knew where I was going (financially speaking) and was enjoying the ride.

RETIRED: Now that I am retired, I no longer have to save for FIRE. I am far from wealthy, but it's pretty cool being "more than FI". In my first 8 years of retirement I have spent between 52%-86% of my net salary when I was working. I actually had more to spend than that. But recall, I never spent my net salary so having these funds for spending is essentially a huge "raise" for me. I started at 52% and have been consciously working at spending more. This is an enjoyable task... but unless a purchase or experience has value to me, I'm not buying it.
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Old 07-13-2017, 10:11 AM   #15
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Ill give you real round about numbers as best as i can remember , Take home from work about 50k, pension take home 84k. we started to live "large" my last year of work we spent about 35. That was up from the the 25-30 range last last 10 years before that. I no longer pay soc security, pension dues, 457k, 401k, state income tax on my pension, pension contributions (that was about 8%). I brown bagged it my whole career so spending money on work food was not a line item. I took the bus/train most of the time so I didnt have real commuter expenses. I did buy new uniforms (work clothes), but I got I think about 1000 bucks a year for uniform maintenance whether I used it or not, I spent less. So in essence we now spend about 55k so im at over 100 % of my last take home pay.
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Old 07-13-2017, 10:27 AM   #16
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Retirement spending is in the 20 - 25 % of last working income. But no change in lifestyle, I don't require much to live on. I probably spend less that what I was paying in taxes while working. Currently living off off dividends/CGs but when SS+pension+RMDs kick in down the road income will be close to work income.
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Old 07-13-2017, 11:01 AM   #17
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Good answers all, thank you. Exactly what I was wondering. While I will always be firmly in the present 25% bracket, my taxes will be lower as will the effective rate, because as so many pointed out, I pay taxes on all after tax savings, which is most all of it now, except company match which is always pretax. I save roughly 25-30% per year depending on bonus size and OT, which will not happen in retirement. Whatever is "left over" will be saved. You save 7+ % off the top just for no more SS & Med, plus SS is only taxed at 85%, and my state, as do many, allow a much larger deduction for over 65. My gross working salary will be higher than my gross retirement income, as it is silly to IMHO to keep on working if the net is much higher. Plus, like many here, I have easily marketable skills and side hustles that can fund something unusual if needed. OMY gives exponential gains because it adds so much while reducing the time needed to fund pre SS, that is is easy to quickly flip from netting less than to netting more, even much more. Approx $65k will be combined pensions when I turn 62. DW ERd from teaching at 55. But I also plan on the what if if one of us dies early, then tax rate goes up and income goes down.

We pay about $44k in fed, state, FICA, Med, & prop tax now. In retirement, after age 65, calculators show about $25k paid, at a lower effective rate based on gross
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Old 07-13-2017, 11:09 AM   #18
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Our spend money is equal or a little bit more than my spend while w@rking. Incoming rents have gone up while costs remained fixed.
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Old 07-13-2017, 12:00 PM   #19
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Our spend money is equal or a little bit more than my spend while w@rking. Incoming rents have gone up while costs remained fixed.
So your the evil, rent gouging landlord I always hear about.. The rent control/rent stabilized activists will soon be picketing at your door front.
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Old 07-13-2017, 12:04 PM   #20
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My NET working income is a meaningless number because it changed so drastically in the last ~10 years I worked. After working full-time for 16 years, I reduced my weekly hours worked from 37.5 to 20 in 2001. Then, in 2007, I reduced my weekly hours worked from 20 to 12. That lasted for 17 months before I was able to choose the ideal number of weekly hours worked - ZERO!


With my wage income twice dropping a lot, which wage income amount should I compare any retirement income amount to, for retirement purposes?


It just so happens that my overall investment income today is about what my wage income was in the first part-time era (2001-2006). But that includes the more irregular cap gains distributions. If I include only the more reliable monthly and quarterly dividends, then my current investment income is slightly less than my wage income was in the second part-time era (2007-2008).
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