The 80% figure; professionals discover what we already know.

[nun]

Here is an article that questions the orthodoxy of the 80% figure for retirement income. FYI, I'm currently planning on my net income (ie after tax) in retirement being 33% of my pre retirement income because that's what I spend right now.

Are You Saving Too Much for Retirement? - Yahoo! Finance

 

[pb4uski]

I've always believed the 80% rule of thumb to be bunk. It might be in the ball park for someone who is living paycheck to paycheck, but for those who LBYM it would typically be way to high. My spending is a lot less than 80% of my income and I'm sure that is true for many others on these boards.

 

[JmfromTx]

Excellent article. They could have left out the last paragraph though. I would be uneasy withdrawing 6% even for the first few years.

 

[W2R]

Here is an article that questions the orthodoxy of the 80% figure for retirement income. FYI, I'm currently planning on my net income (ie after tax) in retirement being 33% of my pre retirement income because that's what I spend right now.

Are You Saving Too Much for Retirement? - Yahoo! Finance

Your planning is sound IMO. If it costs you "x dollars" to live right now, it will cost about the same to live the same sort of life after you retire. You will spend less on work-related expenses, but that savings is not huge. If you plan to travel extensively or engage in other expensive pastimes, you can adjust accordingly.

I have been spending about 25% of my gross pre-retirement income so far, but this year that is up a little. I am still spending less than 33%, though. On the other hand, I spent less than 25% before ER, because I was way way behind on my retirement savings and had to catch up, and then there were taxes as well as SS, medicare, and pension contributions.

I am enjoying the money that I spend on luxuries and pastimes a great deal more now than I would have while working, because I have more time to enjoy them. So, I am glad that I am able to spend more now than I did before retirement.

 

[jIMOh]

Here is an article that questions the orthodoxy of the 80% figure for retirement income. FYI, I'm currently planning on my net income (ie after tax) in retirement being 33% of my pre retirement income because that's what I spend right now.

Are You Saving Too Much for Retirement? - Yahoo! Finance

A quote half way down article:

Do your own math. Pre-retirees should try to calculate those discredited rules of thumb and estimate their own retirement needs more specifically. Look at how much you're spending now, and see which costs you think will disappear when you retire, or during your retirement. For example, when will you pay off your mortgage and finish helping your kids pay for college? How much will you save in taxes once you're not working? Add in more for costs, such as health care, that could go up.

The 80% rule is a lazy man's way of doing math. The devil is always in the details.

 

[RockyMtn]

Using a preset amount of one's former income is useless. To use an extreme If I make $600,000 per year yet only spend $120,000 per year that's 20%. So now all of the sudden I'm going to jump up to 80% a year and spend $480,000? Absurd.

The better barometer is what did you spend before retirement and how will your retirement affect those spendings. I'm actually spending well below what I spent while I was working. No more dry cleaners, fewere meals out, less gas and maintenance on the cars, no more work clothes, etc.

Where do they find these people? How much I made was never the issue...it was how much did I save of what I made and how much did I spend to live on.

 

[akck]

When I first started out planning for retirement, I too used the 80% rule and figured I'd be working to "normal" retirement age or even beyond. As time went on, it just didn't make sense. I started planning for less and early retirement became a possibility. When I reached my 50's, I started using current expenses for planning, less those that will disappear at retirement. With those numbers and comments made on various boards, retirement at 60 is now a certainty.

While JmfromTx is uneasy withdrawing 6% even for the first few years, it's actually part of my plan. Not all of our retirement income streams will be coming online at the start, so the IRA will take a larger hit until they do start up, followed by 0% withdrawals for at least a decade (MRW's transferred to a taxable account). Projections show the portfolio will survive this with as low as a 2& annual return.

 

[scrabbler1]

Using a preset amount of one's former income is useless. To use an extreme If I make $600,000 per year yet only spend $120,000 per year that's 20%. So now all of the sudden I'm going to jump up to 80% a year and spend $480,000? Absurd.

The better barometer is what did you spend before retirement and how will your retirement affect those spendings. I'm actually spending well below what I spent while I was working. No more dry cleaners, fewere meals out, less gas and maintenance on the cars, no more work clothes, etc.

Where do they find these people? How much I made was never the issue...it was how much did I save of what I made and how much did I spend to live on.

I agree. As I have written in other similar threads, I twice reduced my weekly hours worked, the first time to just over half of what I had been earning as a full-time worker, and again to a level about 1/3 of my full-time earnings. Eighty percent of which pre-retirement salary?

Instead, used my pre-ER expenses as a starting point and adjusted them to fit my ER budget. Basically, it was an elimination of FICA taxes (YAY!) and commutation expenses (Double YAY!) in exchange for greater health insurance expenses, at least at the start. The rest of my expenses changed a little or not at all.

Once I had that figured out, I looked to see if I could generate that much in income (not being eligible for SS or my pension or unfettered IRA withdrawals, I have to rely solely on my taxable account investments) plus some more as a cushion to cover me against unforeseen expenses and inflation.

 

[Koolau]

In a previous thread, we discussed how our spending compared to our final incomes. IIRC, I was one of the few who admitted to spending 100% or more currently. Though this wasn't to plan, I had it covered by back-ups.

While I agree that any "rule" (80% or otherwise) is fraught with danger(s), it's not a bad starting point for beginners, IMO. True, an "exact" retirement budget would be a much better way to plan, but we don't all have the luxury of knowing 1) how our lives will turn out 2) how our retirement spending will vary from 80%. Ideally, each year (or each planning session) one should hone in as much as possible on his/her own situation regarding retirement spending. In most cases, the earlier the retirement, the lower the % of final earnings. Of course, this too is a generalization.

What I would suggest to those who pitch the "80% rule" is to advise folks to start at 80% and then adapt as they get closer to retirement and as it becomes clearer what their retirement budgets may look like. YMMV is a good rule too!

 

[explanade]

What kind of expenses go away? Off the top of my head, fuel or transportation costs, maybe more lunches at restaurants than you'd have.

What else?

If you were already LBMY while working, there may not be as much fat to cut once you stop working?

 

[nun]

What kind of expenses go away? Off the top of my head, fuel or transportation costs, maybe more lunches at restaurants than you'd have.

What else?

If you were already LBMY while working, there may not be as much fat to cut once you stop working?

Those will be my major savings. My car commuting costs are $200 a month for me so when I retire that will be a nice bonus. Also I won't be buying lunch each day in the cafeteria which is another $150 a month I'll save. $350 a month will pay my federal taxes or my healthcare premium.

 

[explanade]

Hmm, I live a mile from work but I drive home for lunch most days. So at most I'm putting on about 80 miles a month commuting.

I may actually tend to eat out more for lunch, maybe go for coffee more ...

I guess if you withdraw from taxable accounts, you pay cap gains which is less than income taxes?

 

[Chuckanut]

My expenses will probably stay the same. First, I will have to pay at least $6500 a year for medical insurance above my current contribution. Second, I plan to travel before the Dr says "sir , do not venture far from a good medical centre".

 

[RunningBum]

What kind of expenses go away? Off the top of my head, fuel or transportation costs, maybe more lunches at restaurants than you'd have.

What else?

If you were already LBMY while working, there may not be as much fat to cut once you stop working?

Not sure if you are arguing for the 80% rule, but my main case against it is the 30+% I was putting aside for retirement that I no longer do since I'm now in retirement. That's not really an expense, but it shows how meaningless it is to base retirement needs on your income if you're not living paycheck-to-paycheck.

A second big one is taxes. No FICA, and I can be tax efficient on where I draw my money from for living expenses.

Otherwise, you're right, at least in my case. My other expenses have pretty much stayed the same. Basing my retirement expenses on my pre-retirement expenses was pretty accurate, after I added health insurance. But basing in on my pre-retirement income was meaningless.

 

[nun]

Basing my retirement expenses on my pre-retirement expenses was pretty accurate, after I added health insurance. But basing in on my pre-retirement income was meaningless.

80% income always annoys me because income is never defined, is it gross or net.

Using this "rule of thumb" just points the the laziness of the retirement industry. They should start by asking what the pre retiree spends and pays in tax so a post retirement estimate can be made to account for no retirement savings, FICA, commuting, proposed cruises etc.

I also have an issue with 80% being too high because most people will simply never be able to save enough to replace 80% of their income even including SS because they don't save enough. Consider a married couple earning $100k a year, 3% inflation, 3% annual pay increases and 6% investment return. If they save 10% of their income, increasing the amount by inflation each year, for retirement for 40 years they will end up with $2.48M, annual income of $317k and a SS benefit of $114k. I'm just projecting using inflation, investment returns and current SS calculators, no accounting for politics. Using the 4% rule their investments will sustainably generate $99k and adding SS they'll have $213k income. 80% of their final income is $253k so they are $40k short. To make the plan work they have to save 15%. That might not seem like much to some on here, but most people would be hard pressed to do that.

 

[theOAP]

Basing my retirement expenses on my pre-retirement expenses was pretty accurate...... But basing in on my pre-retirement income was meaningless.

+1

At the time of retirement, I calculated I would require 43% of my final salary to sustain my pre-retirement living standard into retirement. I have done so, and 6 years later (and with 6 years of inflation added), I now require 55% of my final salary.

I find 'retirement calculators' using the 80% (or higher!) figure absolute rubbish.

 

[BTravlin]

Not retired yet but plan on it in three years. Retirement spending should be about 38% of pre-FIRE gross income after the recent near economic meltdown. Being in sales within the building products industry, I would love to be able to spend 38% of pre-meltdown income. And if I could get 80% pre-meltdown? Time to party like a big dog!

 

[Huston55]

Agree that retirement income requirement should be based on expenses versus some % of salary. This is Joe D's YMOYL; when the lines cross - ta da! FI.

So, we've used our actual spending to set our estimated retirement expenses and adjust from there. We've found, not surprisingly I think, that our actual expenses (excluding savings and taxes) as a % of gross income have trended downward; from 55% in 2008 to 38% in 2010. That's due in part to raises but, largely to more savings.

 

[explanade]

Still working, I guess I wouldn't have to make IRA, 401k and additional savings to my taxable accounts.

Guess I never thought of those categories as spending.

I spend quite a bit on travel and one of the things you'd want in retirement when you have time is to at least travel as much as you were before.

 

[scrabbler1]

One difficult thing to calculate in ER versus when I was working was income (not FICA) taxes. This was because my health insurance premiums would become partly deductible on Schedule A but exactly how much of it which would be deductible depended on my AGI. And the AGI was not always consistent from year to year because of uneven cap gains distributions, even long-term cap gains which ended up (federally) taxed at 0%. I actually included a skeleton version of my income tax forms in the spreadsheet to figure this out. I also had to link a skeleton version of my state income tax form because I could deduct state income taxes on my federal return.

 

[Birchwood]

The 80% is ludicrous.
All of which depends upon your living expenses and lifestyle.
I happen to be in a very high income rate, but my lifestyle is so low, and I save like heck in the last 26 years.
Actually your present income is only a small part of it. How much you can spend yearly depends on how much you saved.
In my case, my living expenses remains the same.
I expect to do some travel the first 5 years of retirement which will add.
We'll keep the same cars as long as it runs.
I don't drink coffee.
I eat P&J sandwich and an apple for lunch and mostly eat at home for supper. Eat out on weekends only.
Buy clothes on sale.
Try to do things that are free.
BTW, I'm, glad to note that some say they enjoy their money better in retirement since they have the time to appreciate it.

 

[explanade]

When you actually sell funds as part of your annual withdraw, can you choose those shares that were purchased over a year ago so that you get the lower capital gains rate?

For instance, I have VG funds that I've bought over the years.

Of course in a year's time, they would all be over a year old so I guess they'd all be at the long-term capital gains rate.

 

[scrabbler1]

When you actually sell funds as part of your annual withdraw, can you choose those shares that were purchased over a year ago so that you get the lower capital gains rate?

For instance, I have VG funds that I've bought over the years.

Of course in a year's time, they would all be over a year old so I guess they'd all be at the long-term capital gains rate.

I have always used the FIFO (First In First Out) method when I sold shares of my mutual funds over the last 20 years I have been in them. From what I recall at the time of my first sale circa 1991, this was the default method for IRS purposes. And, as you have figured out, it gives you the best chance of having the sale taxed at long-term cap gains rate.

It can be a little tricky to keep track of the shares you have sold, but using a simple spreadsheet it can be done.

 

[arebelspy]

I've always believed the 80% rule of thumb to be bunk.

Using a preset amount of one's former income is useless.

80% income always annoys me because income is never defined, is it gross or net.

I find 'retirement calculators' using the 80% (or higher!) figure absolute rubbish.

Agree that retirement income requirement should be based on expenses versus some % of salary.

Man people here just love to bash on the you need X% percent of your income (rather than expenses).

It can make sense to use income for many people, just not us here. As I've posted before:

While I agree that planning retirement based on income instead of expenses is Stupid, with a capital 's', let me offer a small defense of it, and hopefully everyone won't jump all over me, but recognize it may make a little sense for some people.

It doesn't for most on this forum because we LBOM. MOST people though live AT or even above their means!

If their lifestyle while working is paycheck to paycheck (as it is for the vast majority of Americans these days, from what I understand), their expenses level IS their income level.

So it could make sense to start there and say "Okay, I'll need less in retirement because no commute, etc etc, so 85% of my income" or "I want to do X, Y, and Z, so I need 135% of my income."

Now yes, those authors could still put expenses and have all those LAtYM people put their income, however most of those Americans don't know their expenses!

So while yes, I wish every article used expenses for planning, for most Americans (who don't know their expenses and live at their means) it is easier and quicker (and yes, lazy on the author's part) to say income. It may be the only thing that makes sense to all of those people.

Even though it makes no sense to us. It's easy to forget sometimes we're in the small minority, because everything you hear here is in such strong agreement.

For example, everyone bashing using income to plan retirement.

Still a bad idea, but hope I showed you it could make a small amount of sense for people not on the ER forum. Don't flame me too hard.

tldr: using expenses is ideal. Since most people don't know their expenses, and their expenses = their income anyways, as they live paycheck to paycheck, using income instead of expenses works for the majority of people.

 

[Gumby]

If you need 80% of your current income to live on, I don't see how you've ever been able to save enough to build up a nest egg to replace that income. Income tax and payroll tax (Medicare/SS) likely take up the other 20%. That fact alone tells me it's nonsense.

As virtually everyone on this board agrees, you need to know your current spending, make necessary adjustments to reflect any spending differences attributable to your retired versus working status, and build up a big enough nest egg to replace that amount.

You don't need an expert to tell you that.