Is 80% of current income replacement needed?

[Donny68]

Thanks for the input everybody!

 

[CRLLS]

+1 The 80% rule is like a broken clock that is right twice a day. For people who live from paycheck to paycheck 80% might be about right if their net pay is ~80% of their gross pay and that is what they spend. For others who save a substantial part of their earnings it overstates what they need to retire... which benefits investment services providers because the more people save and hold in investment accounts the more they make in fees.

^ +1 You beat me to it. And since, according to so many news reports, many are not saving for retirement, it is probably a pretty good statement for the general public. It could be used to scare somebody into al least thinking about saving. What they don't say is that 80% should be including SS. But since most of us here do save prodigiously during our working years, the rule doesn't exactly fit us.

 

[DrRoy]

As some others have said, do not go by your income, go by your spending, and adjust it for changes in retirement. In my case, I am spending 100% of my pre-RE expenses, but on somewhat different things, like more travel.

 

[Danmar]

The 80% number is more of a rule of thumb for the masses and serves its purpose as such. Many on this site, including me, would suggest estimating an RE spending need based on your actual circumstances and/or plans for desired RE lifestyle. Some need 50% and some need 150%.

Exactly. Build your ER budget from first principles based on actual spending desires in retirement. I spend more in retirement than when I was working but neither number bears any consistent relationship to how much I earned prior to retirement.

 

[Cobra9777]

It seems to me that the crux of retirement planning is having a very detailed understanding of spending... current spending while working, what goes away when you retire, what increases when you retire, and what changes as you age. When I was OP's age, I tracked current spending religiously. But I didn't start extrapolating that into retirement until about age 40-45, although I always had an intuitive sense of what we needed for our lifestyle.

At 45, we had two kids in college, a large mortgage, huge federal income taxes, and we were saving close to 50% of gross salary. I knew those items would go away when I retired, along with some smaller items like payroll taxes, commuting costs, clothes, dry cleaning, etc. After retirement, we increased spending on travel, hobbies, and home improvements. I've also made projections by category to age 100. Many items decrease over time (downsize house, travel, hobbies, fewer cars); while others increase, primarily medical care.

Point is, none of this has any bearing whatsoever on our prior gross income. I don't even think about "income" in retirement. I only think about cashflow... spending, how we "cover" it, variability, sustainability, and risks.

FWIW, our current spending is about 25% of pre-retirement gross income. But even that number is somewhat misleading because the last few years included large employee stock option exercises which had accumulated over many years. If I normalize for that, it's more like 40%. But that will be drastically different for different people. There is no way to generalize.

Pay no attention to industry rules of thumb. They're just intended to benefit the industry. You're off to a great start. Just keep doing what you're doing and focus on your own detailed analysis of what the future holds. You're quite young, so the picture will be fuzzy for a while. You just have to deal with that.

 

[FIREmenow]

Seems to me people keep thinking in terms of SAVING after retirement ("How much should I have") instead of shifting the focus to SPENDING ("How much will I spend").

Just as much thought needs to go into SPENDING accuracy/plans for after retirement, as you spent one SAVING accuracy/plans before retirement. And each of those is very personal to every situation.

Before retirement: SAVING matters most, after retirement, SPENDING matters most.

 

[Rustic23]

Our number is 38% of our gross income at retirement. There are years we spend more, i.e. this is our 50th wedding anniversary and we plan a celebration, but it is based on an average years expenditures.

 

[YVRRocketSurgery]

IMO, 75-80% pre-retirement income is just a starting point that gets people to understand that you don't typically need full pre-retirement income replacement because hopefully a chunk of working year expenses will disappear after retirement. Of course, there's a lot of situational dependencies around that.

We're tracking current expenses to get a baseline in terms of dollars needed in retirement to maintain current lifestyle. On top of that, we're tacking on retirement (spending) goals like travelling, etc.

However, one nut I'd like to add to our model/forecast but haven't been able to crack yet is variable bell curve-like spending. Retirement articles talk about spending more early in retirement, then trending down as you slow down, and then trending back up as medical costs increase. I'm not even sure if that's possible in that you can't really predict how your desires, goals, and health will evolve as you age.

 

[Pilot2013]

I just took a look. Between taxes, FICA, Savings, etc., I take home 54% of my current GROSS income. Considering I also put about 10% of that away, I'm thinking I need 44% or maybe even less.

 

[flyingaway]

I am currently saving 50% of my income. So how that 80% is calculated?

 

[Just_Steve]

I'm glad I retired before I found this board otherwise I might still be w*rking. I based my income streams on 80% of my net not gross. That was my goal to retire but I surpassed that goal and receive 89% of my net salary. It's been working very well the past 18 months and I foresee no future issues.

 

[Shanky]

I spend less in retirement than my Federal Income tax used to be when I was working. Lifestyle remains about the same. Except for no tuition, savings, work expenses etc. Our spending on necessities and fun are pretty close to what they were before I retired. Our retirement spending is about 1/3 of my former income.

 

[Scuba]

The first step is to accurately determine how much you spend. Many of us spend much less than we earn, because we are saving for retirement. (Even among those saving for retirement, there are differences in how much we save.)

Then, determine what expenses will vanish when you retire, such as work clothes, commuting costs, and so on. Likewise, determine what new expenses may arise when you retire, such as travel cost, entertainment, etc. Adjust the amount you presently spend by your expected changes in spending.

Figuring out what your needs may be in this way, seems to work pretty well. At least, it did for me.

The 80% rule is stupid, IMO. It's SO individual. In retirement I have never spent more than 50% of my highest salary, and others here spend more than their highest salary. Everyone's situation is so different.

+1
Well said, W2R!

 

[Red Badger]

+1.
And if you are serious about retiring early, you can make moves that will help you get by on less. Downsize your home or pay it off. Move to a lesser cost of living location. Move to a walk friendly, bike, public transportation city and sell one or both cars.

Many of us are living in retirement (semi-for me) on much less than 80%. Again, when you no longer have to save for retirement each paycheck, that is a real game changer!

Play around and see if you could get by on 50%. Many do.

Also, consider PT work at something you enjoy-maybe a hobby job. Even a few hundred extra each month can take some pressure off. good luck!

After drinking the 80% Kool Aid (because financial community seemed almost universal on this) I finally sat down and ran my expenses for six months. They were right at 50% of income. The balance was going to SS, 401K, med insurance, etc.

My take away was, like the other snake oil peddled by many FA's, they have a $$ stake in keeping people believing in the 80% rule as that ensures a larger portfolio to carve out their 1-2%.

Rule of thumb = rule of dumb. Lot's of good advice offered here by folks a lot smarter than me. It's all about the outflow (expenses) and the inflow (income). Gotta balance the buckets- nothing more to it.

 

[brucethebroker]

On my last go round with the Megacorp-provided financial planner, he insisted that I needed to use 80% of my current gross income as my initial retirement income requirement... until I showed him a spreadsheet I had built from the last 10 years of tracking our expenses. Over half of our expenditures where in categories than would no long apply (like college costs) or would be greatly reduced (like taxes). Even making "worse case" adjustments for things like medical and adding in higher "luxury" expenses for things like travel, the result was more like 60% of my current gross income.

And the reaction from the FA was......?

 

[Winemaker]

Since DW and I were comfortable in our spending budget while we worked, we planned to have the same "net" that our paychecks provided. We also planned annual raises just as if we w@rked. I am 11 years out from SS if I take it at 70, and we haven't decided yet to when DW will take hers.

We have 7 years left on the mortgage and that will provide a significant raise for more travel, grapes and French oak barrels.

 

[SecondCor521]

My current spending, about 1.5 years post-FIRE, is about 14% of my final working year's W2 wages, and that is without any sense of deprivation whatsoever.

I will point out something on taxes: Generally speaking, when you're working toward FIRE, you pay taxes based on what you earn; when you are FIREd you are - very roughly speaking - taxed on what you spend. If you spend much less than you earn, then your taxes in retirement will be vastly lower.

To illustrate how dramatic this point is: I currently spend less than 60% of how much my taxes dropped in retirement. Not my real numbers, but it would be like spending $30K per year, pre-retirement taxes of $50K, and post-retirement taxes of $0.

 

[jzajzz]

it doesn't hurt to be conservative IMO .. I plan on being at 100% .. while trying to reduce expenses as much as I can .. it's retirement after all .. I plan to enjoy the heck out of it.

 

[kcowan]

After drinking the 80% Kool Aid (because financial community seemed almost universal on this) I finally sat down and ran my expenses for six months. They were right at 50% of income. The balance was going to SS, 401K, med insurance, etc.

My take away was, like the other snake oil peddled by many FA's, they have a $$ stake in keeping people believing in the 80% rule as that ensures a larger portfolio to carve out their 1-2%.

Rule of thumb = rule of dumb. Lot's of good advice offered here by folks a lot smarter than me. It's all about the outflow (expenses) and the inflow (income). Gotta balance the buckets- nothing more to it.

I agree completely. I did a detailed budget for the first time as I was retiring and discovered that the mix of expenses was radically different. We did cut back on obvious waste, like multiple credit cards and cell phone plans. Bought a Magicjack way back then when long distance was a factor.

The main item that dropped was clothing. Entertainment switched from regular eating out to special occasions. Travel went up but cost per day went way down. Lots of surprises. But overall much lower than w*rking. Gas and parking alone was major. Now we hate to pay $24 to park downtown so we take the bus. We had never taken the bus when working.

 

[jollystomper]

And the reaction from the FA was......?

He accepted it, His comment was that he rarely sees such thorough documentation and estimates for retirement expenses that we provided. Obviously he doesn't work with folks who frequent this site.

 

[Fedup]

I never believed in the 80% replacement rule because in the last 5 years, my husband and I saved over 40% of our income into retirement account, and almost 15-20% in tax,FICA. So that means we only need at most is 50% of our income when we retire.

 

[Senator]

I always wanted to achieve 100%+, so I would have plenty of cushion. In reality, you only need 30%, providing you maxed out your 401K working and paid off your mortgage. Here is how I calculate, based on a $100K salary.

You can live the same lifestyle making only ~$36.5K per year as someone who is making $100K a year that still has a mortgage payment and is maxing out the 401K.

Desc	Amount
Salary	$100,000
-FICA	($7,650)
Less 401K	($24,000)
Mortgage P&I	($16,836)
Tax Savings	($15,000)
Annual Total	$36,514
Monthly Total	$3,043
Salary Equiv %	36.51%

 

[urn2bfree]

When my son was in grade school he brought home a "science" book of experiments we could do at home. One of them was a set up where you burn a candle under an upside down glass with the glass perched with a little gap under the rim in a shallow water bath. The candle was supposed to burn up all the oxygen with water rising to fill the glass. Then you measure how much of the volume of the glass was filled and it tells you the percent of the air that is oxygen.
We ran the experiment and with average glasses and one candle it comes pretty close to the "correct" answer. But we altered the glasses and candle number. With bigger glasses/bottles (less water filled) or more candles (more water filled) it clearly fails. (Explanation below)
The bottom line is that the 80% guide to retirement income replacement is similarly wrong. It works for a very narrow group who happen to live on most of their paycheck- it works not because it is a sensible way to think - but because for a select group it aligns with the correct answer. As others have said, it is all about SPENDING, not related to earnings.

*explanation- for an average glass the heat of the candle expands the air about the "right" amount. More candles expand the air more. Bigger bottles the air does not heat up as much and fills in less. The effect on volume by heating the air makes this a bad method. A better solution would be to place a chunk of steel wool at the top of a glass perched in water bath. The oxygen and steel interact making rust and using up the Available O2 until it is gone. Then the water will rise filling in the gap to the correct proportion by volume.

 

[NW-Bound]

... The 80% rule is stupid, IMO. It's SO individual. In retirement I have never spent more than 50% of my highest salary, and others here spend more than their highest salary. Everyone's situation is so different.

Hmmm... I wish I could spend more than my highest salary. My stash is not that big. Guess I am not that good an investor. Or was I a lousy saver?

 

[Bigdawg]

I always wanted to achieve 100%+, so I would have plenty of cushion. In reality, you only need 30%, providing you maxed out your 401K working and paid off your mortgage. Here is how I calculate, based on a $100K salary.

You can live the same lifestyle making only ~$36.5K per year as someone who is making $100K a year that still has a mortgage payment and is maxing out the 401K.

Desc	Amount
Salary	$100,000
-FICA	($7,650)
Less 401K	($24,000)
Mortgage P&I	($16,836)
Tax Savings	($15,000)
Annual Total	$36,514
Monthly Total	$3,043
Salary Equiv %	36.51%

Congrats on the one full year of Fire!