Comments please

[dory36]

Lots of discussions on occasion about what you need after ER, and I haven't been able to get the data needed to update Firecalc, so I thought instead I'd make a quick and dirty "How much will you need in retirement?" page, to make my case versus the "70-80% of preretirement income" myth.

Before I make it more public on the firecalc screen, I'd appreciate comments.

There is zero cosmetics or explanations, but the page should be pretty self explanatory for those willing to mess around. I'll add bells and whistles before making it more widely available.

See it at http://fireseeker.com/spending

Thanks in advance for suggestions/comments....

Dory36

 

[ESRBob]

Dory,
I'd give them a place to put any other adjustments up our down to their current spending/lifestyle that they think they might want to do in ER -- more travel, education or what not (or increased belt tightening if they are prepared to commit to a lifestyle downshift to make ER work).

I am also a nut case for calculating some sort of amortization for one-time purchases that are actually recurring every several years, car mostly. Some other posters here have come up with something in the range of 500 per month or 5-7 k per year or therabouts -- it would be nice to have a place for that. Finally, I'd say Just double back to make sure none of this double-counts with something already covered in FireCalc (like annual investment management fees).

 

[LOL!]

Income taxes -> Income and FICA taxes or Payroll taxes

A subtotal of the subtracted amounts above "This is the annual ...." might be nice.





Wait a minute ... this is too much like what I do at work all day ... reviewing other people's spreadsheets.

 

[Rich_by_the_Bay]

Dory,

(I know you are not focusing on cosmetics now, but the yellow background in the text fields on my computer totally obscures any highlighting of text, so I couldn't see what field I was in, let alone what text was selected.)

During early retirement, at least in the US, the health care expenses BEFORE Medicare might be $10-12000, while AFTER Medicare (e.g. age 65), they drop precipitously. Might be good to ask about that.

I was confused by whether "debt service" is supposed to include mortgage payments.

Hope that helps.

 

[azanon]

Dory,

Just glancing, these are things that seem odd to me:

1. "Amount going to mortgage payments, credit card payments, car payments, etc =40%"  Ive always heard that one's mortgage shouldnt be more than 28% of total income, and total debts shouldnt be more than 36%.  I think assuming the typical person has 40% of gross going to debts is way too high.   Myself personally, my total debt (including mortgage) as a percentage of income is under 20%, and i have a mortgage.

2.  If the standard deduction for a couple is 10K (which it is), then subtract 10K from the $30,900, not 20K.   Meaning the remaining 20,900 is taxable.

3.  For someone who makes only 75K a year, I think assuming 27% to taxes total (state + federal) is a bit high.  Its probably closer to 20%.   Are you possibly confusing the marginal rate of someone who makes that with their actual tax rate?   A good portion of a 75K dollar income either is not taxed (the first 10K), taxed at 10%, or taxed at 15%.    The marginal rate of 28% is only for a small portion (im too lazy to look up the exact amount).   The state portion should be pretty small.   Some states have no state tax.  And this is to say nothing of tax credits such as if one has children (the average american family has 2.3 children).  If someone (like me) is putting 17% of that income in a 401(k), none of that is taxed.    Participate in a fexible spending account?  That's also not taxed.   So trust me, its closer to 20% of the 75K going to actual taxes when you consider everything.

4.  If the raw numbers came out to 43% needed, where's the safety margain?  I didnt see that on the list.   I cant speak for other people, but I know i wouldnt take the gamble that i'm not off by 5% (or worse!!) on my estimation in the wrong direction.    Remember, this is an estimate.  Thus, it should be given the respect that an estimate deserves.

5.  If you cant tell, i'm not convinced the 70% of gross needed recommended by professionals is a myth.  Some of the others mentioned vacations to be added in there too.   Take that + the safety margin I just mentioned + lower tax to 20% + lower the debts to reasonable levels, and you're already knocking on the door of 70% of gross needed.

 

[dory36]

Az - let me clarify - anything in yellow is just sample data, and is intended to be revised by the visitor. The percentages just display the relationship of whatever the input expense is to the input gross. I put in some fairly random figures as starter numbers only. The tax exemption, for example, assumed a high mortgage with deductible interest double the standard exemption.

Maybe I should start with zeros instead, if it is misleading. Maybe I'll do that this morning.

I will be adding lots of explanatory material before making it more widely public, including many of the comments here.

Some of your comments give me the chance to think out loud about stuff that I wrote long ago, and embedded in the worksheet, but didn't repeat here. Here is some of the thinking that will need to be clarified and explained in the worksheet:

The safety factor number is already buried in the annual amount available/annual amount needed figures, along with costs of groceries, haircuts, vacations, and however else people spend their money separate from the itemized entries. Working people don't (well, shouldn't) budget out their last penny for essentials, so there ought to be some "slop" in the amount available. That same amount will be in the postretirement amount needed. The idea I had discussed in the forum long ago, and I was trying to show here, was a side-by-side comparison of spending when the only difference was the job, without the countless "what ifs" that can always be added.

My diatribe from previous threads was essentially this: Even without looking at the calculations, it seems clear that the taxes, Social Security, and work-related expenses all add up to a good percentage of people's gross. The amount going into savings and investments alone are often a pretty large part of the total preretirement gross for anyone seriously planning on early retirement. (I think mine was 10% in 401k and 40-50% in regular investments and savings in my last couple of working years.)

Since these do not need to be replaced in your after-retirement spending, they grossly distort any rule of thumb based on gross income.

So... I was then arguing that you needed to base calculations not on gross income, but on gross spending for those items that would continue through retirement... and once you have that figured out, then start adding in what you want to have for your travel, hobbies, and whatever that you'll do after retirement.

 

[astromeria]

I think "Amount going to mortgage payments, credit card payments, car payments, etc" is confusing--after all, almost all of our bills are paid by credit card, but we have no debt at all. I thought it was more clear the way you had it before. Perhaps a compromise like "Debt service, including mortgage payments, loan payments, and revolving credit card debt." A stark reminder of how debt hurts.

I also think pre-filling in fields with national average amounts is useful. For one thing, it affirms my suspicion that my husband's employer (a state college) contributes d@mn little to our health insurance compared to the average employer (our annual health care cost for 2 is ~$6000). On the other hand, those who beat the average can feel pleased about their employer contribution.

While it's painful to see that garden-variety individual health insurance in our late 50s will cost 1/3 of our income, that tells me it's well worth any effort to lower that number.

Dory, this is a great, simple calculator that I plan to share--Thanks!

 

[azanon]

Az - let me clarify - anything in yellow is just sample data, and is intended to be revised by the visitor.  The percentages just display the relationship of whatever the input expense is to the input gross. I put in some fairly random figures as starter numbers only. The tax exemption, for example, assumed a high mortgage with deductible interest double the standard exemption.

Maybe I should start with zeros instead, if it is misleading. Maybe I'll do that this morning.

I understood this.  I was trying to suggest more accurate average entries that would be more representative of the average person.  But I think you'll find once you adjust the figures to a more average entry, you're bottom line will not be far from 70% of gross; that is if you work vacations and a small margain of error (because who in their right mind would not build in a bit of safety for something so important!).

The safety factor number is already buried in the annual amount available/annual amount needed figures, along with costs of groceries, haircuts, vacations, and however else people spend their money separate from the itemized entries.

I think you mean safety for unexpected expenses.   I was talking about safely that your actual analysis just might be in error.  It is an estimate is it not?  Say for instance a flat-tax is implemented years down the line and the base tax level is 18% instead of 10%.  Then you're going to be paying more tax.   

My diatribe from previous threads was essentially this: Even without looking at the calculations, it seems clear that the taxes, Social Security, and work-related expenses all add up to a good percentage of people's gross. The amount going into savings and investments alone are often a pretty large part of the total preretirement gross for anyone seriously planning on early retirement. (I think mine was 10% in 401k and 40-50% in regular investments and savings in my last couple of working years.)

I just buy the argument you see more commonly presented, that these things that are no longer funded (ie: 401(k)s, work expenses), are offset by things you used to not have time for when working such as new (expensive) hobbies, vacations, summer homes, and on and on.    Now if you're talking about the cost to simply "exist" after retirement, then maybe we're on a different page here.

.....

I've brought this up before in various forms or fashions to others here too Dory.  If i just wanted to "exist" after i retired, i'd have no problem doing so on probably 1/4th of what i make if i were willing to move back to my small hometown in Eastern Arkansas where the average per capita is 19K a year.  So, ultimately it comes down to what kind of retirement life we are talking about here.    For me, i'm shooting for the one full of entertainment, excitement, and travel.   And i know to do all that safely and comfortably, i'd be wise to plan for at least 70% of gross;  in my opinion that is.

......

Dory, i just get concerned when a website is telling people that its ok to retire on 43% of gross when its sometimes hard to undo what could end up being a big mistake.  I recall TH saying he'd have no problem getting his job back.    I'm not sure I could say the same.   My job is not the kind that I could just get back on a whim.

 

[brewer12345]

Dory, let me second that SS and medicare taxes need to be explicitly stated, especially since this is a big line item for most folks.

A couple others:

- cost of kids/college tuition: My expenses came in higher than I would have expected in part because my expense base is pumped up due to kids in the house.  That's a big outflow that goes away for most retirees.

- Income taxes: Not sure how you are calculating this.  If my marginal rate is 25%, my actual effective rate is quite possibly well below that.  You might want to change this to effective rate and give some comments as gudance.

 

[azanon]

- cost of kids/college tuition: My expenses came in higher than I would have expected in part because my expense base is pumped up due to kids in the house. That's a big outflow that goes away for most retirees.

Yeah but what if you, as a potential eventual grandparent, want to help send your grandchildren to college. Perhaps one's son/daughter doesn't end up being as responsible about saving for these things as you were, and you dont want to see your grandchildren suffer because of it, or feel obligated to sign up for a GI Bill to possibly go die in Iraq because they cant afford college.

 

[brewer12345]

Yeah but what if you, as a potential eventual grandparent, want to help send your grandchildren to college.   Perhaps one's son/daughter doesn't end up being as responsible about saving for these things as you were, and you dont want to see your grandchildren suffer because of it, or feel obligated to sign up for a GI Bill to possibly go die in Iraq because they cant afford college.

Sounds like a discretionary expense to me, not a necessary living expense I would plan for. Also, if we are talking about an actual early retiree, they are unlikely to have ay idea what the future will hold for their kids when they retire, let alone their grandkids.

 

[unclemick]

Second that - ie it's a great simple calculator.

Math is math - life is life.

We ran from 12%(my cheap SOB low) to 55%(remodeling year) over the last twelve years. Now in changed circumstances - best guess 50-60% this year based on then current 1993 $ not inflation adjusted.

Given the wide variety of ER lifestyles - a nice simple calculator is a nice benchmark start.

I like it.

 

[azanon]

Sounds like a discretionary expense to me, not a necessary living expense I would plan for.  Also, if we are talking about an actual early retiree, they are unlikely to have ay idea what the future will hold for their kids when they retire, let alone their grandkids.

I believe a lot of grandparents do in fact plan to fund their grandchildren's college, regardless of whether the parents are responsible.   The kind of grandparents that would do this would likely be those that are fiscally responsible (ie: us, in other words).   I'm not a grandparent yet, but if 1.  I am eventually one and 2.  I love him/her/them as much as my son, then the likelyhood of them not having the money for college is very low (sarcasm, its more like 0 actually).

 

[Rustic23]

Dorey,
I have no problem with the logic of your calculations, however, for me I have always wondered why folks look at 70% of their gross pay for this calculation. I start with my take home pay. I know this is a bit more difficult for self employed, but for those of us that get a pay check, all of our current bills are paid from this sum. Most of what is taken out goes away when we retire. i.e. 401K contribution, Income Tax, SS, union dues whatever. What I am left with is what I can spend. Now how much of that do I need. What I won’t need in retirement (cost of commute, lunches out, cloths, etc.), and what increases will there be (health care maybe, more travel, hobbies, golf ?). It seems to me a much simpler calculation. Then the question becomes ‘What have retirees added and what have they subtracted’. What are the lifestyle changes? Does this create an increase or decrease in available cash. It would be nice to know that I only need say 75% of my current gross income, however what if that is 20% more than my current take home? (is that possible, I think I just confused myself)

Anyway, I only found you board about three months ago. Thanks. It helped DW and I to make the decision to leave the work force this May.

 

[Coach]

Dorey, I like this calculator. I think you're starting at the right first question -- What income would it take to maintain my current lifestyle in retirement? -- to get people thinking about how much they really need. They can then modify that income requirement for lifestyle changes they are planning. As you say, " (You'll need to add in whatever else you'll need for fun etc…)"

It nice and simple, designed to get people thinking rather than to build a full retirement budget.

Coach

 

[Jane_Doe]

I like it! Seems like a nice simple calculator. Very user friendly.

Have to say I would add a disclaimer (YMMV, no guarantee, etc. for the idiots out there who think other people are responsible/liable if they run into trouble )

Thanks again, Dory!
Jane

 

[cute fuzzy bunny]

Tough one. My life changed completely when I ER'ed and so did my budget, by an order of magnitude. I seriously expected to have a years paid vacation and go back to work, but when I started deconstructing my expenses and lifestyle, I found that it was sustainable (and plenty enjoyable) at a far lower out of pocket cost.

Some people move to boats or RV's, some downsize, some want to just keep the same exact life minus that work thing.

Thats why I'm having a hard time with a calculator format.

If I was going to take a guess at my post ER expenses in 1999, I'd have said half...maybe a quarter of my working life spending.

 

[ESRBob]

Dory,
You might also look at Work Less Live More for a few comparables -- there is the set of worksheets on pages 75-77 to go step-by-step from current takehome pay to post-ER annual spending, and there is also the set of two families' finances -- Pre-ER and Post-ER on pages 79-82-- which show how the Post-ER family is living on about 35% of their previous gross with little compromise in consumption (though with certain assumptions such as switching to one car and house paid for post-ER.)

 

[dory36]

Dory,
You might also look at Work Less Live More for a few comparables -- there is the set of worksheets on pages 75-77 to go step-by-step from current takehome pay to post-ER annual spending, and there is also the set of two families' finances -- Pre-ER and Post-ER on pages 79-82-- which show how the Post-ER family is living on about 35% of their previous gross with little compromise in consumption (though with certain assumptions such as switching to one car and house paid for post-ER.)

Great idea - thanks. If it's ok with you, maybe I'll just use your examples (and reference the source).

There used to be a great website called something like keepingupwiththejoneses or the like, that disappeared a few years back. It was a utility that let you plug in an annual income, 2-3 other stats like family size, rural vs urban, own vs rent, etc., and it would then show you typical spending for that income and situation, based on the Statistical Abstract of the US.

 

[Rustic23]

Got to looking around, and found this. http://www.bls.gov/cex/ it has a survey of consumer spending. One othe last columns of the last chart has retired spending. Lots of good statisitcs.

 

[LRS]

Sorry if this is a stupid question. Right now my husband's employer pays 100% of our health insurance. We are on the hook for co-pays. When we retire, we will start paying 100% of our own health insurance. Now, don't we get a tax write-off for some portion of the money we pay on health care related expenses? And if so, how much of it can we write off?

For instance, I reckon we'll need about 12,000 for health expenses the first year (could be more.) Say our base expenses for living comfortably are $50,000; we'll need to draw an additional $12,000 for health care from our investments. Does this actually raise our taxable income by $12,000? Or do we first get a break on the $12,000 we spent on insurance, then tax is calculated on the remainder?

 

[cute fuzzy bunny]

Generally you can write off health care costs on what exceeds 7.5% of your AGI.

If you...umm..."time" your withdrawals and pool your expenses, you can have very little AGI in alternating years, and a whole lot in others. For example, taking a years expenses in december and then again 13 months later. Paying all of your real estate taxes a little early while deferring medical expenses a month or two. That may work out in your favor. It might not. Use something like turbotax to model it.

Yes, taking the extra 12k may raise your AGI. It depends on where it comes from and how its harvested. Regular income like interest? Qualified dividends? Long term capital gains?

 

[Nords]

Generally you can write off health care costs on what exceeds 7.5% of your AGI.
If you...umm..."time" your withdrawals and pool your expenses, you can have very little AGI in alternating years, and a whole lot in others.

If you go this approach, make sure that the doctor's staff knows you're without insurance (or have a high deductible).  Once they know they don't have to bill & process through an insurance company they may squeal "Woo-hoo!" and give you a 20% discount like our kid's dentist does.

If you're paying your own way (those high deductibles again) you may also be able to bunch your medical expenses into the same tax year by doing "annuals" at periodicities of 11 months between the first two, 13 months between the second & third, 11 months between the third & fourth, and so on.

 

[foxhuntr]

I like it. I got 53% gross required after retirement, which matches very closely with my plan.

Thanks for all the good work on this.

 

[ESRBob]

Great idea - thanks. If it's ok with you, maybe I'll just use your examples (and reference the source).

Dory,
That is fine by me and just reference book info and publisher thx.

With an actual worksheet though you can probably do better than the book by including some of the detail on types of taxes or some additional calculations which people could use if they wanted or just accept the defaults from the book examples -- something like that. PM me if you like and we can work on it together.