Are Retirement Needs Overstated?

[Niuatoputapu]

"The model used by many financial planners for retirement planning doesn’t accurately reflect how retirees spend during their early and middle retirement years, which means advisors might be overestimating how much their clients will need to save for retirement."

Many of us know that the 12x salary for the nest egg or 80% of final salary for the first year of spending are WAGs that fail to consider many relevant factors. Nice to see M* discussing it.


Are retirement needs overstated? | BenefitsPro

 

[Ed_The_Gypsy]

I certainly hope so.

Sent from my SM-G900V using Early Retirement Forum mobile app

 

[Rustic23]

Some expenses that were paid out of my final salary that I don't pay now:

Saving for retirement (a big item!)
Pay Roll Tax
Commute Expense
Extra Car
Lunches five days a week
Extra dry cleaning
Fewer dinners out because DW and I neither felt like cooking

I don't really know if it all totals 20% but my guess is it is quite a bit more!

On the added side, we travel a little bit more, but not a great deal. That's about it.

 

[pb4uski]

Yes, I think retirement needs are frequently overstated, particularly if based on 80% of final salary.

To begin with, many people don't spend 80% of their salary to begin with. When I was working, my take-home pay (after SS, income tax withholdings, health and dental insurance contributions) was slightly less than 80% of my gross. After 401k and HSA savings I was doing my take-home pay was only a little over 50% of my gross pay, so even if we spend every penny of my take home pay (had no after-tax savings) it would have been much less than the 80% commonly used by FPs. In my case 80% would have resulted in a 60% overstatement of what was needed to retire (80%/50%).

Also, as the linked article points out, real spending commonly declines as retirees age as their level of activity declines and could be factored in but commonly is not.

 

[daylatedollarshort]

Our retirement living expenses are a fraction of our former gross earned incomes and that is with still supporting kids in college.

They've decreased due to:
Lower income taxes (at least until taxes on RMDs kick in)
No more need to save for retirement
No more job and commute costs
For most of our retirement the kids should be off the payroll
Mortgage interest decreasing over time
More time for DIY, price shopping, time to drive on some vacations instead of always having to fly due to time constraints, bargain hunting, cooking at home, optimizing expenses
Not paying as much into Social Security

 

[unno2002]

Personal opinion: It is % of final working year SPENDING, not salary, that matters.
At 10 years before retirement, we started to "downsize" spending toward eventual pension income. Each year, it provided more funds for investment, and training to live within means.

 

[rodi]

I agree with the others.

Since I contributed 26% of my gross to 401k, I was already well below 80%. Factor in SS/Medicare taxes and it's even lower. That said - health insurance went up.

My rough swag retirement budget was based on gross income minus retirement savings, minus SS and Medicare taxes, then adding back in health insurance. (I have a much more detailed budget based on historical spending from quicken data - but it works out remarkably similar.) Almost a year in, we're spending less than the rough swag number. The unknown for me is taxes... I had some 1 time tax things last year. 2015 taxes will tell me if I over or underestimated things.

 

[Gumby]

Many of us know that the 12x salary for the nest egg or 80% of final salary for the first year of spending are WAGs that fail to consider many relevant factors.

All the more reason to start by identifying your actual spending -- now and expected. You need enough to cover that spending, not some multiple or ratio of some other number.

 

[ERhoosier]

Agree 100% that 80% is just a WAG for most folks. IMHO too rough to be useful. Differences in expenses are very individual. Like HUGE difference between late 50's ER with solid employer-supplied retiree HI vs poor ER souls needing to buy unsubsidized Exchange Plan with those huge premiums & deductibles. Particularly in high cost regions, it is not unusual to see those folks' actual total spending to go UP after retirement.
Others whose spending can go way up in ER are those ex-w#rkoholics who now have the time to take the $$$$ trips they dreamed of.

 

[Al18]

I'm within 2 years of being retired, and have closely monitored my spending over the past 6 years.

% of gross paycheck
401K savings: 27%
non-retirement savings: 24%
SS, Medicare, Fed and State taxes: 21%

Live on: 28%

Out of that 28%, I have a car payment, real estate taxes, etc.

When I retire, I figure my spending will increase about 20% for additional weeks of vacations, etc. I'm budgeting for 15% above that number, for unknown expenses.

 

[rodi]

I'm within 2 years of being retired, and have closely monitored my spending over the past 6 years.

% of gross paycheck
401K savings: 27%
non-retirement savings: 24%
SS, Medicare, Fed and State taxes: 21%

Live on: 28%

Out of that 28%, I have a car payment, real estate taxes, etc.

When I retire, I figure my spending will increase about 20% for additional weeks of vacations, etc. I'm budgeting for 15% above that number, for unknown expenses.

Keep in mind that federal and state taxes don't go away. They may change a lot - but still need to be accounted for in your overall budget.

 

[Bamaman]

We've found ourselves spending more in retirement than when working. I no longer have the company car and expense account for one.

But we're at the point in our lives where so many of our assets need replacing--like boats, cars, etc. And we're also having to do substantial repairs to our real estate, now that I have the time to work on them.

And with so much time on our hands, we find ourselves traveling extensively on big vacations. But the rest of the year, we stick close to home--seldom going over 2 hrs. away.

 

[hnzw_rui]

Keep in mind that federal and state taxes don't go away. They may change a lot - but still need to be accounted for in your overall budget.

True but until you reach SS/RMD age, you have fairly good control on optimizing taxes. Might even be worth doing some Roth conversions.

 

[Options]

True but until you reach SS/RMD age, you have fairly good control on optimizing taxes. Might even be worth doing some Roth conversions.

This. And if you have taxable, tax-deferred, and Roth accounts, you can strategize further to reduce taxes post-retirement. Pre- and post-retirement taxes are two different ball games.

 

[Telly]

Our spending during 2014, if I subtract out the extra FIT paid for Roth conversion, was about 35% of my last salary... and my last salary was 13 years ago

 

[Danmar]

All the more reason to start by identifying your actual spending -- now and expected. You need enough to cover that spending, not some multiple or ratio of some other number.

Yes, totally agree. You should build up your retirement spending requirements from first principles based on a good historic understanding of where you have (and would like to ) spend in retirement. Using a percentage of pre retirement income is a lazy shortcut. Also needs are quite different than wants and a good retirement spending plan should consider both.

 

[mpeirce]

Personal opinion: It is % of final working year SPENDING, not salary, that matters.

This is so true.

The last few years before I stopped working the amount of money pouring into savings kept going up. When the mortgage was paid off, that same amount went into savings. The 401(k) was maxed out. The ESPP was maxed out. These, along with some taxes like FICA, just stop when you stop working.

 

[AllDone]

I used to argue this point with a coworker, he just could not wrap his head around the fact that you stop saving money for retirement once you retire. He's a smart guy, but he's still working.

 

[cbo111]

I used to argue this point with a coworker, he just could not wrap his head around the fact that you stop saving money for retirement once you retire. He's a smart guy, but he's still working.

That's what we call a quotable quote!

 

[wmc1000]

with health insurance costs added in we project a 40% spend to final salary rate

 

[Andre1969]

I just psychoanalyzed my last paycheck, and got the following breakout:

Federal Tax: 10.42%
State/local Tax: 7.24%
SS: 5.98% (weird, I always thought it was 6.2%, but I think what you pay in health insurance reduces the amount taxed?)
Medicare: 1.4% (Thought this was 1.45%, but maybe the above applies here too?)
401k: 24%
Excess Life Insurance: 0.24%
Dental Insurance: 0.32%
Medical Insurance: 3.15%
Vision Insurance: 0.14%

Net pay: 47.11%

 

[imoldernu]

One good thing about being poor, is that we don't have to pay income tax.
We do overspend on our Florida home, and our lakefront camp, but FL wil go away this year, and the lake place in another two or three years. An extra $10K to $12K/year that will disappear.
Old cars, low maintenance, low tax living quarters, and a lower cost of living area help.
One additional benefit that I have never seen mentioned in the discussions about "where to live"... Al three of our places are in what we call unitary government... community/city areas. This means that the city or community management consolidates the power utility, water and waste removal services. Instead of rogue price increases that can spike these expenses, our three city/community management teams are powerful negotiators for the interests of the people.

As far as the % of retirement expenses to the last years salary... after 26 years, the real dollars are about the same. Inflation adjusted, about half.

 

[hnzw_rui]

I just psychoanalyzed my last paycheck, and got the following breakout:

Federal Tax: 10.42%
State/local Tax: 7.24%
SS: 5.98% (weird, I always thought it was 6.2%, but I think what you pay in health insurance reduces the amount taxed?)
Medicare: 1.4% (Thought this was 1.45%, but maybe the above applies here too?)
401k: 24%
Excess Life Insurance: 0.24%
Dental Insurance: 0.32%
Medical Insurance: 3.15%
Vision Insurance: 0.14%

Net pay: 47.11%

Dunno about psychoanalyzing your paycheck but...

Yup, no SS, Medicare, federal income tax and state/local income tax on health/dental insurance premium deductions. 401K and life insurance premium is also exempt from federal and state income tax but are subject to SS and Medicare.

 

[Koolau]

We currently spend about twice what we spent when w*rking - which is also significantly more than final salary. Part of that extra spending is the cost of Paradise (aka Hawaii) but we also have significantly added to our charity and kids houses, kids Roths, etc. spending. Since it is all in our original plan, it is not a problem (and can be curtailed significantly if need be.) I always thought the 80% rule was okay for most folks (within its limitations) but also knew it was not appropriate for our plan. YMMV

 

[daylatedollarshort]

My first ER light bulb moment came after I randomly picked up a homesteading magazine at someone's house and realized it didn't cost all that much to live and still have all the basic necessities of life. We ended up keeping the same house, upgrading the cars but cutting out a lot of unnecessary and overpriced consumer goods and services that were keeping us on a work - spend - work treadmill.