Do you need 70% of your pre-retirement income

[Meadbh]

My pension plan only pays out 52-70% of the final average salary after 30-40 years, and that is non-COLA'd. We used to contribute 4% of our income, but now we have to put in 6%. Wish I had a COLA'd pension.

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Count yourself lucky. I wish I had a pension.

 

[Asher Aion]

Ditto.

 

[THOMPMD]

My Pension Freezes

At the end of this year. I have almost 28yrs. In lieu of the frozen pension they are going to add an additional 5% of our gross annual income at the end of each calendar. The mega-corp I work for has been extremely hard on its hourly work force and I have only had 1 2.5% wage increase since 2007. Thank heavens we started long ago planning. We started other ways to earn money outside of work and educating ourselves like we are here and I feel we are very efficient with the dollars we have. Your advice is very much appreciated.

 

[Koolau]

As others have said, it's what you plan to spend during retirement that is important. Figure that out and then you can calculate how much you need to save. In our case, we were always relatively frugal before retirement. Now (perhaps making up for lost time) we spend significantly more than we did before retirement and actually more than we earned before retirement. So rules of thumb are only for folks with no fingers. Figure out what you will need for retirement spending and then work backward. YMMV

 

[imoldernu]

A 26 year look back at my ending salary in 1989. The net/net is that our current annual spending equals that final years' pay.

Lots of water under the bridge since then... No complaints.

 

[hnzw_rui]

That may be the case, but that is based on a flawed mental model of the employee spending up to salary while working, then eliminating work related and educational expenses at "retirement age". For those of us who have been LBYM all along, expenses and salary had only a weak correlation.

This is easy when salary is high. For someone making little more than minimum wage, I reckon 70-80% is about right.

 

[Fermion]

Lets see, last year we paid $60,000 just in federal income tax (not counting SS or medicare or ACA extras).

Our spending is about $40,000

So we actually don't need 70% of our pre-retirement income, we just need 67% of that federal tax back.

 

[lem1955]

As others have said KNOW THY SPENDING. We live on 37% of my last year's earnings at BIG JOB that ended in 2011. The last 4 years it's been 138% of my part time earnings at my non-profit job. Semi-retirement has been great for getting comfortable with not saving and spending from past saving.

 

[martyp]

When I was w*rking, the amount of money I lived off of, after savings, FICA, and taxes, was about 50% of my gross wages. Now, my COLA'd pension gives me 85% of that amount. I've found that I'm spending even less and have plenty to put into savings each month some of which I have been using for travel expenses.

 

[beowulf]

I'm confused by all the comments about "we spend XXX.....not including taxes, health costs, housing, and whatever." To me, the only true measure of expenses is what you spend - and that includes housing, health, taxes and anything else that passes from your hands to someone else. If all your outgo comes to $100K a year, you don't get to subtract items that you don't think are expenses. If it goes out the door, then it's an expense and part of your budget. Savings by any means are not part of expenses.

In our case, fixed gross income after retirement (for a 2 earner family) is 50% lower than what it was prior to retirement. Post retirement income includes pensions and SS. However, our expenses prior to retirement - meaning the money wasn't readily available to us anymore including savings - were 100% of our income. This includes normal expenses, taxes, 401Ks, IRAs, I bonds, etc., etc. The only way it can be different for anyone is if they spend more than they earn through use of credit (which many do - maybe not on this list, but in the general population.

Our post retirement expenses are equal - just about 100% - to those of pre-retirement, just in different categories. A LOT more spent on travel (many trips by land and sea to exotic places around the world - we are away from home about 50% of the year). Nothing spent on savings, SS, pension costs, etc. This means that, for a few years, we will be drawing far more than 4% from our savings. It's unlikely we can continue at this pace for any length of time - for both physical and economic reasons, but it's a lot better to do things you want to do while you are able to, rather than wait until you are older and can't. We are lucky in that our income from other than withdrawals from savings will pretty much cover all our outgo once we ramp down on the trips in a few years. RMDs will also force us to keep traveling . After we stop, we can enjoy the over 100K digital jpgs, mpegs, etc. we are accumulating. That's what we worked for - not about to sit around and wait to grow older counting pennies.

 

[Fermion]

I agree with you Beowulf except I do not think it is required to spend a ton of money on trips around the world when you probably have not seen quite a few amazing things within 1000 miles of your home (which sits unused for 50% of the year and is thus a pretty big wasted expense).

Is renting a small 1 bd apartment and using that as a base for trips like hiking the West Coast trail on the outside of Vancouver Island for a week with a total cost of less than $500 really that much less of a life experience than getting groped at the airport, catching a cold on the flight, then crowding in an elevator to go up the Eiffel tower, for a total cost of $5,000?

But both things may require you to be young enough to be physically capable of the journey.

 

[devans0]

As I ran numbers for us, 70% in retirement with lower taxes is equivalent to 100% with wages.

 

[beowulf]

Fermion - we traveled on a tight budget for shorter trips for many years when we had young kids and before we retired and had limited annual leave. We did get to see most of the US that way, but overseas trips were rare. We could travel much more economically than we do now - but why? At our age there is no cheap way to see the wonders of Patagonia or sail off the northern coast of New Zealand or visit vastly separated Pacific islands. Actually, going to Paris is a lot cheaper than $5K if you are willing to travel in the low season. 175 sq foot ship cabins are still fun if you're young, but, as you age, a bit more room for a 30 day cruise is nice. We are finding great prices in Europe due to the strength of the dollar against the Euro. When we were there a few years ago, it was $1.40 and more per Euro. In April of this year, we were paying $1.08 per Euro .

We have and will rent apartments for trips that are at least two weeks when we can a base camp. But our house is paid for, so that makes it cheaper than a huge storage unit . And we have lots of friends where we live - and they keep asking us if we've moved .

 

[hnzw_rui]

I'm confused by all the comments about "we spend XXX.....not including taxes, health costs, housing, and whatever." To me, the only true measure of expenses is what you spend - and that includes housing, health, taxes and anything else that passes from your hands to someone else. If all your outgo comes to $100K a year, you don't get to subtract items that you don't think are expenses. If it goes out the door, then it's an expense and part of your budget. Savings by any means are not part of expenses.

Depending on your after-tax savings rate, it may be fair not to include taxes in the expenditures. For example, your take-home is $60K but you save $20K and only spend $40K. For single living in CA, that's a withdrawal of $77K ($12K+5K tax) versus just $47K ($5K+2K tax). More so if you plan on relocating to a lower COL area with no state income tax upon retirement.

There's also cases like Fermion's where income taxes are much higher than actual expenditures due to having very high income. I reckon it's safe to assume he won't be withdrawing $400+K a year in retirement ergo, taxes should be much lower than the $60K he's paying now.

Housing, you still pay property taxes, maintenance, etc but the mortgage might be paid off already so that's possibly one less thing on the retirement budget.

As for health, that may just be because someone is covered by employer health insurance and doesn't know how much individual insurance would cost particularly if playing the ACA subsidies game.

 

[scrabbler1]

I split taxes into 2 parts. One part are the minimum amount of taxes I expect to owe. Some of those taxes such as property taxes do not vary by income so they are a truer annual expenses than some of the income taxes. With income taxes, I have a basic amount I expect to pay assuming a certain amount of reasonable and reliable investment income such as monthly and quarterly dividends. However, cap gain distributions are highly variable, ranging from zero to a large spike. With cap gain distributions, if they spike in one year then my income taxes may also rise, as they did in 2010 when one of my bond funds had a huge short-term cap gain distribution. However, the only reason my tax bill rose was because I had that added income so it was a certainty I would be able to pay the added income taxes. I don't budget for those income spikes, nor do I budget for the income tax spikes.

 

[frayne]

opinion: The key to what matters is pre-retirement spending, not income. Our retirement income is more like 30% of our pre-retirement income, but is in line with our pre-retirement spending. While working, the rest we invested.

bingo

 

[beowulf]

Sorry, hnzw rui, I don't buy that logic. Either you pay taxes, medical and home related expenses or you don't. If your home is paid off, then you don't include the mortgage. If you pay property tax, maintenance. etc., then you include those. We are talking pre and post retirement here, not a "what might be" picture.

I am retired. I know what I spent before I was retired and what I took in. Now that I am retired, I know the same information. It's just in different categories, and, as I said in my post, unless I am running up credit card or other debt, what I get in retirement, plus what I withdraw from other resources, equal what I spend. The fact that my investments might increase or decrease so that my actual assets at the end of the year are more or less than I started with has nothing to do with how much I spend or bring in. If you relocate to a lower cost area after retirement, great, and that would lower your costs. But, in the end, you still spend what you spend and take in what you take in (or withdraw).

You can project all you want, but you really don't know your actual numbers until the end of the year and you have to include everything to be honest about the comparison between before and after retirement.

 

[Meadbh]

You can project all you want, but you really don't know your actual numbers until the end of the year and you have to include everything to be honest about the comparison between before and after retirement.

I agree. Taxes have to be paid and if one does not have a pension, one must withdraw from one's portfolio to pay them. The exception that I make is asset reallocation. For example, I recently withdrew $$ from my taxable portfolio to invest in an income property. That was a reallocation from equities to real estate (fortunately just before the recent correction).

 

[hnzw_rui]

Sorry, hnzw rui, I don't buy that logic. Either you pay taxes, medical and home related expenses or you don't. If your home is paid off, then you don't include the mortgage. If you pay property tax, maintenance. etc., then you include those. We are talking pre and post retirement here, not a "what might be" picture.

You can project all you want, but you really don't know your actual numbers until the end of the year and you have to include everything to be honest about the comparison between before and after retirement.

For someone not yet retired, a projection really is all you can do. However, there are things you can more or less predict (e.g. paying off mortgage before retirement), expenses you can eliminate (FICA taxes, work-related expenditures, retirement savings, etc) and additional expenses (travel, medical, etc) to more or less figure how much you'll need to budget and save for retirement.

As for taxes, until you're 70 1/2 and taking RMDs, you've got more control over taxes than while you're working. Taxes should be quite different for a couple earning $90K at a job versus getting the same amount from qualified dividends and LTCG. Instead of using the same income tax numbers while working, you can use (presumably lower) estimated taxes from TaxCaster or something.

 

[Danmar]

I treat income taxes as an offset to income. It is income that causes income taxes and it thus seems more intuitive to treat such as a negative income. Obviously property taxes or health premiums are expenses and I treat them as such. If my income taxes go up it is only because my income has gone up more. Income taxes are deducted at source from my pension so it is easier to record the net amount.
Obviously you can treat income taxes as a stand alone expense item, but doesn't seem the best way to me. It really boils down to where you spend your after tax income.

 

[Koolau]

Lets see, last year we paid $60,000 just in federal income tax (not counting SS or medicare or ACA extras).

Our spending is about $40,000

So we actually don't need 70% of our pre-retirement income, we just need 67% of that federal tax back.

When you figure out how to do THAT, let us all know.

 

[audreyh1]

I treat income taxes as an offset to income. It is income that causes income taxes and it thus seems more intuitive to treat such as a negative income. Obviously property taxes or health premiums are expenses and I treat them as such. If my income taxes go up it is only because my income has gone up more. Income taxes are deducted at source from my pension so it is easier to record the net amount.
Obviously you can treat income taxes as a stand alone expense item, but doesn't seem the best way to me. It really boils down to where you spend your after tax income.

Same here. My budget is based on my after-income-tax income. My spending doesn't affect my income taxes - only my investments. My income taxes vary widely each year and can't be predicted, but aren't likely to be more than a certain fractional percentage of my investments. As long as I have my budget amount available to spend after withdrawal minus income taxes each year, I'm golden. That's the first calculation I do after calculating my withdrawal amount each year.

 

[Willers]

I hadn't really considered this, but was interested after reading this so I checked. Next year (our first in retirement) we plan to spend roughly 25% of our last year's gross income.

We once figured out how much we'd need to spend to blow all of our post-tax earnings (skipping the investments in 401k, IRA's, etc. as many do) and thought about how we would spend it all. We couldn't even figure out how we would. Lottery tickets I guess...?

 

[martyb]

My net pay per year from my COLAd pension is currently $8000 more than my final year working (last year). Wife, still working, brings home almost the same as last year. Except for a $60,000 lump sum that I used to buy a boat (about 1/2) and do a few improvement projects around the house, we don't plan or need to take regular withdrawals from savings anytime soon. When wife is ready to stop working, my Reserve retirement will kick in and replace her income.

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[kcowan]

We treat income tax as an expense item and so try to minimize it along with our other expenses. Granted there is not as much opportunity on that line item!