Do you need 70% of your pre-retirement income

[THOMPMD]

To continue your same standard of living. That seems to be the "standard" the financial planners and some of the calculators? I realize this will vary wildly depending on your lifestyle and how many revenue streams you have, how long it has to last.

I'm also curious how many stick to the withdrawal amount of 4% that is the generic industry standard?

I know there are countless other factors but I'm always fascinated with the answers retirees give and their experiences/advice.

 

[BBQ-Nut]

No. As a former dual income (DW and myself) couple, our total expenses were far below 70% of our pre-retirement net income (LBYM).

And the 4% SWR is more just of a guideline (arrrr) and used as a 'check'.

 

[jimbee]

Nope. I didn't need 70% of my pre-retirement income when I was working, why would I need it when retired?

 

[Senator]

Nope. I didn't need 70% of my pre-retirement income when I was working, why would I need it when retired?

++1

Here is how I figured out how much I needed. Numbers are rounded.

Salary 100,000

FICA -7,650

401K -24,000

Purch Vacation -2,000

House Pmt -17,000

Remaining $49,350

That's less than 50%. Factor in less work expenses (lunches, commute), and less taxes. Add in additional health care expenses and more leisure activities like travel.

Then double it just to make sure!

 

[Theseus]

49% is keeping us humming along right were we were pre ER. Will be above 4% WR for a few years, but then we have pensions that cover about 33% of current expenses, so by postponing SS until FRA or better, WR could drop to around zippo. Back to the pre ER income bit, we saved 25% of gross, and 20% of gross went to taxes. Current taxes are way lower, but HC costs much higher. Just gotta find where you can be happy with life and not lose sleep over worrying about having enough, LBYM is key.

 

[big-papa]

++1

Here is how I figured out how much I needed. Numbers are rounded.

Salary 100,000

FICA -7,650

401K -24,000

Purch Vacation -2,000

House Pmt -17,000

Remaining $49,350

That's less than 50%. Factor in less work expenses (lunches, commute), and less taxes. Add in additional health care expenses and more leisure activities like travel.

Then double it just to make sure!

Similar here. Just start with your salary today and subtract everything that's part of saving for retirement:
Pretax: 401K savings and SS payments
Post tax: any amount you save into taxable accounts, adjusted upward for taxes

That gets you to a minimum "same lifestyle" number.
Then you can subtract anything else you won't have in retirement if that applies to you. A paid off mortgage, school tuition for the kids, etc again all adjusted for taxes.
Don't forget to add back in medical insurance if you were on an employer plan before retirement as well as any expenses you expect to be higher in retirement (e.g. travel)

Then start with firecalc and see if that withdrawal per year will last your expected length of retirement given the amount of your savings. If not, then keep working and/or develop a budget and see if there are some easy savings to be had.

bottom line - there is no fixed % that is correct for everybody.

 

[hnzw_rui]

I've always wondered where the 70-80% come from. If you just wanted to maintain the same standard of living, wouldn't it be better to just use 100% of expenses (just subtract FICA and work-related expenses)? Although, perhaps the estimate is for those who don't know how much they're spending.

 

[stepford]

That's a major side benefit of being an aggressive saver. I've consistently split things in thirds: Taxes, Expenses, Savings. Later I started working part time and made 60% of my former salary. Since my taxes also went down I found myself doing 20% taxes and about 40% each on expenses and savings.

In other words, 24% of my former full time salary has been plenty to live on (after tax) the last few years. Allowing for taxes this means I'll need about 1/3rd of my former full time income in retirement. Since FireCalc shows 100% success at a spend rate of 50% of full time salary I think it's time to go.

 

[Rothman]

The answer is, it depends if your spending need happens to be 70% of your current income after taxes. This is true because that's what you need, that fact it would be 70% is coincidental! Your focus should be on what you need and I've learned a lot on this site about people spending as much effort on reducing what they need as on saving the sum to be FI. Many of us took what we spend for granted but if you use 4% SWR you need to save 25x what you need to spend in retirement annually so cutting $10,000 in annual expense means you need to save $250,000 less, if you save $50,000 per year towards retirement that means you could retire 5 years earlier.
The math is all connected work the solution from all sides. Time, your time in retirement, is the most precious to most here.


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[emerytura]

My husband retired 7 year earlier than me. During that time we tested our retirement income. We saved/invested all my earnings, and we lived on my husband's pensions. Now we are both retired and we continue spending the same amount of money, however our biggest expense is travel. We plan to travel extensively for the next 10 years. Travel money will be shifted as needed as time goes. Prior to my husband retirement our spending was 50% higher, due to high cost of our kids education and morgage. Does expenses were gone prior to my husband retirement. Our pensions are sufficient for our spending. We do not have a need to withdraw money from savings/investments. That might change if our health decline.

 

[nun]

I always LBYM. I had a well paying job and lived on 35% of my salary and saved a lot so I could ER, so it's obviously ridiculous to plan on 70% in retirement. Now that I've retired and don't have a mortgage or the expenses associated with working I live on 20% of my previous salary. I can generate that from rent and pension and I don't withdraw anything from my retirement savings. When I get SS I will probably save a lot of that.

 

[MRG]

No,

We lived on 50% the year before as I did my last OMY. Got better after I retired as I had the time to further reduce expenses.

 

[Gumby]

Pre-retirement income is irrelevant. How much do you spend? That's how much you need.

 

[FreeBear]

Check out this ER forum poll showing current expenses as % of pre-retirement income:

Early Retirement & Financial Independence Community - View Poll Results

Basically, the vast majority here live on 20% to 60% of pre-retirement income according to the poll. We're on the relatively high end at 54%. Our withdrawal rate is projected at almost 5% for the next 4 years, then about 3.8% when SS starts.

This isn't ideal, especially given a 40 yrs time horizon, but I was "mad as hell and just couldn't take it anymore". I'd be more comfortable with a SWR below 4% every year, but some folks here aim for less than 3% forever!

With the high initial withdrawal rate, we are vulnerable to a poor market over the next 5-10 yrs (early sequence of returns risk). If things go bad, we'll cut back on our budget. Frankly, I'm less concerned about running out of $$ later in life, so I'd rather spend it now that we are both healthy.

So figure out how much you'll spend in retirement, as others suggested, then run a planner such as Firecalc to determine the odds of success for your specific situation, not some generic guideline.

 

[Al18]

As Gumby pointed out, income is irrelevant. Think about it - say you drive a 5 series BMW pre-retirement. After you retire, you can only afford 70%, so you'll be driving a 3 series BMW. Does that make any sense at all?

In order to retire, you'll need to know what your expenses are and plan accordingly. I save 55% of my pre-retirement income, 20% goes to taxes so I'm living off 25% of my income now. I expect to spend somewhere between 100% and 140% of my current expenses in retirement.

 

[shortstop14]

Checking back, it appears we're now spending about 58% of our income while working - but it's actually a higher standard of living because we're traveling a lot more, since we can. Other expenses are pretty close to what they were before retiring.

The difference is mainly no longer saving for retirement, no longer paying FICA, and reduced federal income tax. Maybe some minimal savings due to no longer paying working expenses - like no longer subsidizing my wife's elementary school classroom.

While we bridge the gap to Social Security and small pension income, withdrawal rate from the portfolio is somewhere between 3.5% and 4%.

 

[Car-Guy]

No, I didn't need 70% of my income when I was working and I still don't need 70% of my pre-retirement income now that I'm retired. Not even close.

 

[Cobra9777]

Right before retirement, we were spending about 55% of gross income, and that included a mortgage and 2 kids in college. Now in ER, kids are on their own, mortgage is paid off, and all work-related expenses are gone. So, even with increased travel and medical insurance, expenses are now 35-40% of pre-retirement gross income.

Pay no attention to industry rules of thumb. They are invented to keep the services of financial advisers in high demand. The crux of retirement planning is figuring out what your expenses will be, including the changing profile from ER to old age. Then use FIRECalc/RIP/i-orp/spreadsheets to determine if your income streams and accumulated assets can support that profile of expenses. Seems to me, your pre-retirement income has no relevance to retirement planning.

 

[rodi]

4% is based on a 30 year retirement. Most of us early retirees plan on a longer retirement - so less than 4%

The 4% was based on the Trinity study that showed if you started with 4% of your investments (X), then inflation adjusted (X) each year. (In other words - the only year where (X) was directly tied to portfolio value was the first year.) It showed that you were unlikely to go broke in 30 years (but might be close to zero at the end.).

As far as 70%... If you are contributing 15% (or more) to savings/401k, by the time you take out SS contributions, medicare contributions, and your savings... you're close to that 70%. That said - it does NOT take into consideration that subsidized health insurance from an employer goes away and health insurance can increase dramatically if you don't qualify for ACA tax credits. We were living on less than 50% of our gross income prior to retirement between savings, extra mortgage payments (which paid off the house before retirement), and the taxes. Because of healthcare, we're now at 60% of our former gross income.

 

[chris2008]

It is just a rule of thumb that comes from people who do not track expenses.
If you know where your money goes pre-retirement you can figure out what you "need" or want to spend later.

 

[diehard1997]

Not even close. We spent about 20-25% of our average earnings during our working years. We were good at limiting "lifestyle inflation" as our earnings increased.


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[H2ODude]

If we held to preretirement spending we'd end up leaving piles of cash to two kids who don't need it. Hence we are aggressively trying to spend about 90% of what our pretax income was. That's still only pulling a tad over 3% of assets and don't intend to touch SS until 70. We had a number of things put us into this favorable situation, not the least of which was I actually enjoyed career until last few years so went many years beyond what was necessary for comfortable retirement.

 

[karen1972]

I only lived off 45% of my income when I was working and then when I retired I moved so my expenses dropped even more so I could have lived off only 25% of what I was making. So really its about what % of income are you using now to live and then base it off that.

I've always assumed 80% was based on lower tax bracket+not having to save any longer...for the "average" person. However, for people that may have already been living paycheck to paycheck, they may find in retirement they need 100%+ to cover medical, a mortgage that may not be paid off, debt that may not be paid off...etc

 

[Markola]

Pay no attention to industry rules of thumb. They are invented to keep the services of financial advisers in high demand.

Another chestnut is "Save 15% of your income", which might be OK if you want to work for 50 years and take full SS if your health holds out that long. If professionals advocated the 50%+ needed for ER, they'd get no clients, just the usual blank looks of incomprehension when it comes to asking advertising-saturated Americans not to spend every dime they have. Great post!


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[6miths]

Agree with the many posts that point out the many variables. In common with many in this biased sample, we never spent anything near 70% of our income during our working years despite having 4 children. Spending might go up at some point but it will be entirely voluntary and not based at all on what we 'need' to spend. Can't ever imagine spending the equivalent of 70% of income from peak earning years. We were very lucky in that regard.