Employment Finance vs Early Retirement Finance

[truenorth418]

Here's an illustration of how early retirement finance is completely different than traditional employment finance.

Here is a breakdown of my spending from 2010, my last full year of employment:

401(k) and other saving 47.3%
Income Taxes, SS taxes, Medicare taxes 37.2%
Health Insurance 0.0% (paid by employer)
Vacation/Travel 3.0%
All Other Living Expenses 12.5%


Here is 2015, after being retired more than 4 years and living completely off of my investments:

401(k) and other saving 0.0%
Income Taxes, SS taxes, Medicare taxes 3.4% (dividend taxes only, no SS/MC)
Health Insurance 7.2% (includes ACA subsidy)
Vacation/Travel 46.9%
All Other Other Living Expenses 42.5%


Of course, this is % of spending, not % of income. My income is much less now than when I was working. But that doesn’t matter, because early retirement finance is completely different than traditional employment finance:

-Saving for retirement is no longer applicable;

-I pay for health insurance myself now, but it's not a big deal;

-Basic living expenses are basically the same today as they were before, but they take up a larger % of my spending since I technically spend a lot less (since I’m not saving anymore);

-And much of the money that used to go to work-related taxes was instead spent on extended travel to Hawaii, Europe, SE Asia, and other fun trips - which will make up almost half of my spending this year.

 

[jjquantz]

Thanks for sharing. Incredible evidence of LBYM!

I'm in the middle of summarizing our past 21 years of spending (that's all the farther back I go with Quicken/Microsoft Money). I find this kind of lookback very interesting. Won't finish my analysis until the end of this calendar year, however.

 

[truenorth418]

Thanks for sharing. Incredible evidence of LBYM!

I'm in the middle of summarizing our past 21 years of spending (that's all the farther back I go with Quicken/Microsoft Money). I find this kind of lookback very interesting. Won't finish my analysis until the end of this calendar year, however.

I hope you share some of your findings when you're ready. Most people probably don't realize that work-related taxes are usually their #1 expenditure, by a large margin. Housing-related costs are generally #2. Financial independence requires driving savings high enough over a long period of time to build critical mass. There's not much one can do about taxes (except make less money, generally not desired), so housing, but also cars and everything else, are critical.

 

[2017ish]

Here's an illustration of how early retirement finance is completely different than traditional employment finance.

Here is a breakdown of my spending from 2010, my last full year of employment:

...

Your budget looks much like our plans; travel! Can't wait to slash the tax line.... Over 50% of spending now; will be much less in retirement, even with 80% of our investment holdings in tax deferred accounts.

 

[karen1972]

I've always known taxes and savings made up almost 65% of what I made.. so my goal was always to replace 50% of my earnings as that would suffice. When I hit my 1 year anniversary I'll have to run the exact numbers. Heck I can't wait to see my tax bill this year... its going to be so tiny...something to look forward to...for once.

 

[soupcxan]

We're still working and of our gross income, the breakdown is:

26% taxes (federal and property tax)
26% spending (excluding taxes)
48% saving (retirement and taxable accounts)

Our annual expenses are roughly 100% of our tax bill!

 

[jjquantz]

I hope you share some of your findings when you're ready. Most people probably don't realize that work-related taxes are usually their #1 expenditure, by a large margin. Housing-related costs are generally #2. Financial independence requires driving savings high enough over a long period of time to build critical mass. There's not much one can do about taxes (except make less money, generally not desired), so housing, but also cars and everything else, are critical.

Will do. DW doesn't seem to be very interested in the project.

 

[tinybro]

Very insightful, thanks for sharing and congrats on executing......

Myself & DW are getting closer, closer, closer but continue to fret about % of expenses post work life.

I see you reside in NY, so do we. Upstate, high property taxes whereever I suppose. Does that have an impact?

You note your %'s and indicate that gross expenses are down. Other note similar results, it's decidely less.

We've always lived well below our means and have been rabid savers--we've done very well and had lots of fun, we expect to continue to do so.

I run budgets/FIREcalcs/etc. til my head explodes and the numbers keep coming in stating our % of working life expenses are going to be in the 50-55% range (accepting some "trouble" which we've funded for) and we won't want.

I work in finance and understand the math, I just can't bring myself to "believe"....

I'm sure it sounds silly and I don't want to horn in on the discussion.

How do you overcome the fear of needing to continue to save/work/etc.

Our math shows us comfortably retired--again accepting the crick don't rise....

Any comments would be welcome and thanks very much.

 

[Golden sunsets]

True; I think it might be more meaningful to remove the savings and taxes from both categories and recalculate the percentages. We all know that taxes scu the results as do savings if they are significant so let's compare spending on the other categories pre and post retirement. That would be what interests me.

 

[truenorth418]

True; I think it might be more meaningful to remove the savings and taxes from both categories and recalculate the percentages. We all know that taxes scu the results as do savings if they are significant so let's compare spending on the other categories pre and post retirement. That would be what interests me.

Sure, but one of the objectives of the original post was to emphasize the impact of taxes and how that can change dramatically after retirement. I don't think most working people understand that taxes are by far and way their biggest expense.

Of course, there's only so much one can do about taxes. Likewise, many years from now when I become eligible to collect my pension at age 65 and take SS and RMD's at age 70 my taxes will increase again - part of the so-called "tax torpedo."

But for now I can't help but marvel that this year, for the first time since 1988, I will not pay any federal income taxes, though I am living more comfortably and happily than ever. In fact, I will actually receive a few thousand dollars from the government in the form of an ACA tax credit.

 

[scrabbler1]

When I was putting together my ER plan back in 2006-2008 in preparation for my eventual ER in late 2008, I used my current expenses with the following changes:


(1) I eliminated FICA taxes.


(2) I eliminated commutation expenses.


(3) Items (1) and (2) roughly offset the addition of buying an individual health insurance policy. Health insurance was my main concern in ER and at times in its first few years (pre-ACA) became my biggest expense, bigger than income taxes, bigger than housing. New York is a hostile state in the individual market although the ACA has made things much more affordable. In the years of ER before the ACA came in 2 years ago, my premiums had risen 50% in 2 years, far more than I had budgeted for, to nearly $700 per month (for one person)!


My income taxes were pretty much unchanged after ER but that was mainly due to working part-time in the years leading up to ER. The income from my investments (made higher because I cashed out my company stock) has been about the same as it was in my last few years of working.

 

[Cobra9777]

The table below shows our pre and post-retirement numbers, all scaled to 100 for illustration. The lower portion of the table is a breakdown of "all other spending" from the top portion.

|Pre|Post|Chg|
Gross income|100|34|-66|post-ER includes 2 pensions, rentals, & taxable dividends
Savings|22|-4|-26|negative reflects withdrawal to cover gap between inc & exp
Federal income tax|20|2|-18
Payroll tax|6|0|-6
Mortgage P&I|8|0|-8|paid off the mortgage right before ER
College|6|0|-6|youngest graduated college right after ER
Other kid-related|2|0|-2|cell phone and car insurance for 2 kids
All other spending|36|36|0

Commute|2|0|-2|gas, tolls, maintenance, depreciation
Other work-related|1|0|-1|dry cleaning, clothes, expensive lunches
Travel|2|4|2
Healthcare|1|4|3
Other living expenses|30|28|-2|cut cable/landline, eat out less, DIY services, etc, etc.
Total|36|36|0

Like OP, most of the change is driven by large discrete items like savings, taxes, mortgage, and college. Other spending is basically flat and the changes are minor by comparison. After ER, we spend more on health insurance and discretionary travel. But these are partially offset by reductions in commuting and other work-related costs. The rest of the offset is in other living expenses... reductions in all the small items that we have time to pay attention to after ER.

 

[swakyaby]

Love seeing the change in income taxes/SS taxes/Medicare taxes, because for me, that line plus deductions from my paycheck for corporate expenses amounts to 50% of my earned income.