80% Rule?

[zbwmy]

Whats wrong with the 80% of pre-retirement income needed in ER? I have no clue how much I will need to live on in 17 years when I retire. Can anybody point me in the right direction of how to figure it out. What percentages of pre-retirement income do you find yourself at?

Mark

Mark,

80% is high. *Look at it like this. When you are working you are probably paying a Mortgage and Saving for Retirement. Lets say for example that you are really motivated and make 100K - You pay about 25K in Income taxes and being motivated you save 30K and the mortgage eats up 25 K. *Your living expenses are 20K after the mortgage is paid.

When you are retired you are no longer paying high income taxes, the mortgage or saving for retirement - So figure you need about 33% to cover living expenses and property taxes. This will be much closer than the 80% number.

[Bob_Smith]

Mark, I'll be at 63%. I don't believe there is any way to figure it out 17 years (or even 5 years) in advance, however; too many variables. At some point the stars will align and you'll know when that happens. In the meantime, save like your life depended on it, invest carefully, and the rest will take care of itself.

[zbwmy]

OK

So it won't be 80%. I buy that, I would like to know what figure to use for all my calculations. I figure erroring on the high side is a good thing.

[wzd]

What I did, and what I recommend rather than a percentage rule, is to start with your current spending. I had a lot of savings, and taxes taken out before I saw my takehome dollars. Then I saved some of my take home dollars, but those were for major expenses like a new car, etc. My retirement savings was pre-takehome. I used my takehome as my target, and it has been pretty close. Now that happens to be about 60% of my old salary. My retirement savings used to be 25% of salary, and taxes ate up another 20%. (I know these don't add up. 401k match was 5% so savings was 20% mine, and 5% from my employer).

Actually my current spending is just a tad higher than my spending while working. However, I still have a mortgage and 3 kids at home. So, my story is about 105% of pre-retirement spending without much of a lifestyle change. We cook at home a little more, and go out hiking (low cost), golfing (learning, costly), etc. a little more. We expect to move in 10 years and get rid of the mortgage, and will be down to 1 in college at that point. I think a smaller house and kids not at home will be a big factor in the future, and that will reduce the number. We may also do more travelling when less encumbered by school vacation schedules, so I am budgetting for 24k less in house expenses, but assuming kid expenses will be replaced with travel costs.

I just didn't retire and make lifestyle changes at the same time, and I don't think most people really do. To summarize, I would start with current spending, which should be arrived at by starting with takehome pay (working up spending numbers without the sanity check of takehome pay is dangerous in my opinion) and making adjustments if takehome pay includes savings. Then figure out what lifestyle changes will occur, and give them dollar figures, to arrive at what you will need. If the changes are in the future, plan the change in spending for the future.

Then, finally add in taxes based on the spending level and the source of funds (i.e. after tax vs. pre tax) - It turns out a lot less than when I was working.

Wayne

[zbwmy]

thanks wayne

[cute fuzzy bunny]

I'm at about 10-15% of pre-ER. Not so much a testament to being cheap as to having been foolishly extravagant at one point.

I've figured my base "non crazy" budget to be roughly $16k per year, and thats covering two people, no kids. I spend about 8k a year on crap I could probably live without. I calculated automobile, appliance and other capital costs over a 40 year period and brought those down to NPV and that was about 6k per year. All these numbers had some big fat pads in them.

No extravagant vacations, meals at home by Chef TH, no hideously expensive furniture for my cats to scratch and dogs to barf on, no brand new luxury cars.

The 16k I can carve down to about 8 by dropping cable tv, high speed internet, inserting a little more pasta, bread and veggies in the diet, cutting all the insurance (health, car and making the home insurance maximum deduction). The 8k is completely discretionary and can be dropped. A lot of that 6k in capital replacements can be deferred for at least several years.

So I think if you take 16k, add debt payments, add your own personal "crap I buy that isnt essential", add in any luxury costs like eating out often, vacations, cars that cost more than $25k, major home renovations, etc, and then add 6k a year in for your payments for future capital replacements...you should have a handle on your costs.

[wzd]

Quote:

I'm at about 10-15% of pre-ER. Not so much a testament to being cheap as to having been foolishly extravagant at one point.

You are one of the ones who was able, and motivated, to change the foolishly extravagant lifestyle after retirement. For someone contemplating such a change, I would submit that it also makes sense to switch the lifestyle before retirement. This has two advantages in my mind, one is that you save up for ER much quicker, and second, you find out if it is a lifestyle you would be happy with.

I guess I was lucky to have had a wish to retire early since I was in my 20's. It was enough to let me set a savings target, and limit (not eliminate) the extravagent lifestyle. Then when I hit my 40's and really wanted to retire early, changing lifestyle a little, savings for a few more years, and a downsizing offer got me there.

We have examples on the board of people all over the spectrum. You just have to decide personally how bad you want to retire versus what lifestyle you want. There are lots of examples proving that you can cut expenses way down, and savor the time that is your own. There are also people that would be unhappy doing that - I know they exist, although I can not understand them.

Consider this thought: If you can cut expenses after your retire, why can't you do it now?

Wayne

[Nords]

That figure was based on a 1980s study of workplace expenses. It included business lunches, office attire, dry cleaning bills, childcare, commuting expenses, etc ad nauseum. Much of that is either optional (business lunches) or even not applicable (dry cleaning) in today's office.

The study didn't point out that not all workers are subject to these expenses. It also didn't consider new expenses after retirement. One of the few "good" things about work is that sometimes you're too busy to spend money, but in retirement there are many new & creative ways to empty your wallet!

So, as was suggested in an earlier post, track your expenses and base your retirement budget on history, with perhaps a small inflation kicker. Pay particular attention to those expenses that you know will go away after retirement and think about things that you'll do more frequently (rising expenses). And you'll want to factor in new activities/hobbies.

You also have capital expenses that may stretch out over decades-- a new roof, replacement cars & appliances, kid weddings, a fantasy vacation or two, and the new wing on the house. Many of those can be identified & projected, but it's not a bad idea to keep the emergency fund after retirement...

[ordway]

I think the "percentage of INCOME" rule of thumb is particularly silly, since it implies that you're spending most of what you earn.

My husband and I are planning our ER nest egg needs based on the assumption that we'll be spending about what we spend now. (We could spend less, which gives us some leeway.) That spending amounts to about 30% of our current gross income. (The percentage has been shrinking as our income has increased, because we are happy with our lifestyle; more money coming in means more to save, not more to spend on stuff we don't need or want.)

Also, the problem I have with the "you will need X% of income" is that it assumes people will spend as much as they can - that if you make more, you will automatically spend more. To a certain extent that's naturally true - we do spend more than when we were grad students - but I think people would be better off if they didn't just keep ratcheting up the spending.

There's no need to downsize if you do things in moderation to begin with, and if you refuse to buy into the must-consume mainstream. It doesn't mean deprivation, it just means knowing where spending will actually give enjoyment (like our nice home theater) and where it won't (who cares that we drive a little subcompact and our neighbors drive BMWs? Not me.) and not spending money on everything just because you can.

Spending is the only thing that matters, not what % of current income you'll need in retirement. For the past year, we've keep a rather detailed spreadsheet of all of our expenses grouped into various categories (groceries, gas, etc.). It is a worthwhile exercise for anyone, even if you don't plan to track expenses this way for more than a few months. The number of things you spend money on that you simply forget about day-to-day are significant. And I'm not talking about junk purchases either. We've refined the budget and now have a good idea of exactly what we spend.

I don't see expenses dropping significantly in retirement, and in fact believe they will increase. Perhaps the elimination of some professional expenses (association dues & conference fees) and dry cleaning, and maybe lower gas (auto) charges. But those will be more than made up by higher charges in retirement for things like health insurance and maybe more travel. (Likely to be much higher since no pension with insurance coverage.) I can easily see 105% of current spend.

[cute fuzzy bunny]

Dont forget the secondary things you spend money on as an effect of employment.

For example:

I've always gotten rid of older cars that started exhibiting problems or had a second car...couldnt afford to miss a meeting or half a day of work because the "car wouldnt start".

I had to have someone do my yard work, clean my house, fix my car, and do maintenance and repair work on my house because I simply didnt have the time or energy to do so myself.

I had to take 2 week vacations in some exotic land to unwind and decompress and get some warm weather because I lived in a stupid part of the country because thats where the best jobs were. Same problem with the housing and related costs. For my high tech life, I needed to live in the northeast or the san francisco bay area to have ready access to 6 and 7 figure high tech jobs.

Sometimes (ok a lot) I had to do extravagant things, buy extravagant stuff, or splurge money as a stress relief or a way to make myself "feel better" after a 70 hour work week.

So I was able to move to a warmer place with cheap housing, but excepting a crappy little cheesy hole in the wall computer store, there isnt anything high tech within an hours drive. A tuneup costs me about eight dollars. About fifty cents worth of cleaners cleans up my house.

So excepting losing the exciting lifestyle of being a real power player : the only difference is I'm not paying for substitutes to do things I didnt have time to do myself, and I dont have to pay for compensations created by the demands of a full time job.

And if the car doesnt start, I can ride a bike to the auto parts store and buy a new part to fix it, and get to the supermarket later in the day. Big deal.

I also have time to make smarter/better decisions on buying stuff. The home theater was mentioned. In my old McMansion I had a $10,000 CRT projector the size of a small car and a subwoofer we used as a coffee table. I bought the "best" after 5 minutes of "evaluation" with the "consultant" at the store. I did often get it on sale or worked out a discount. In the new digs I got a $700 Infocus projector that sits on the table, and a big but cheap subwoofer that makes perfectly suitable BOOM noises. When I replaced my washer and dryer in the old house, I bought a pair of Neptunes because...well...they were about the most expensive so they must be good. Didnt like them. When I just replaced my washer and dryer more recently, I spent four hours reading reviews, looking over specs, and occasionally stopping in at the stores and looking over the products. Bought a nice front loader set for less than half what I paid for the neptunes.

Lunch and dry cleaning just dont quite cut it.

[zbwmy]

Thanks for all your tips. *It is obvious that the members of this board are diverse, and thats a good thing.
I think I will start by tracking expenses for everything.
I like the idea of approaching it from a what you spend vs. % of income.

[cute fuzzy bunny]

Quote:

You are one of the ones who was able, and motivated, to change the foolishly extravagant lifestyle after retirement. For someone contemplating such a change, I would submit that it also makes sense to switch the lifestyle before retirement. This has two advantages in my mind, one is that you save up for ER much quicker, and second, you find out if it is a lifestyle you would be happy with.

I took a couple of years to decellerate. It was mostly habit...the hand whipped out the credit card without the brain even being involved.

It might be hard for someone who grew up in the silver spoon household, or for someone who has incorporated the high flying lifestyle into their "persona". You know who you are, and if you dont, your friends do

I grew up in a cold water flat, and lived on a working farm through my teenage years. After pulling weeds and digging up rocks a few hours, going to school for six hours, then working 3 part time jobs in the evenings and weekends...reverting to cutting my own lawn and scrubbing my own tub isnt too much of a stretch.

[wzd]

Quote:

It might be hard for someone who grew up in the silver spoon household, or for someone who has incorporated the high flying lifestyle into their "persona". You know who you are, and if you dont, your friends do

I know some of those. At least two people who took the same early retirement package I took went back to work. One did it specifically so he could afford expensive toys!

That's why my "thought to consider" was offered up. Some reflection on why you aren't cutting costs now, before ER, is worthwhile in order to understand how you will react to lower spending. It isn't for everyone. This is one area where "knowing oneself" is important.

We are at about 105% of pre-ER spending, and quite happy with it. But as I noted above, in my case pre-ER spending was not lavish, nor was it overly frugal.

Wayne

[cute fuzzy bunny]

I think people spend what they earn for the same reason people in my neighborhood put 5x as much water on their lawns than they need to, or for the same reason they get into credit card debt. The perception that there is limitless future income (or water), and the water in my neighborhood is unlimited for a fixed low cost. Or unlimited at a fixed low interest rate?

I was clearly spending to overcompensate for both my perceived "lack of good living/lack of having stuff" in the first half of my life, and to offset the brain beating I was taking at the office. When I removed the negative stimuli (work), that fixed the second problem. When I figured out that stuff and blowing money not only wasnt making my life better, I found it was often making it worse.

Then for the stuff I found that really mattered, I found quality substitutes that cost 1/10th or 1/2 and were almost as good.

But it takes time to decompress from a hellacious working environment, it takes time to develop the inward insight to stop using money as an emotional support tool, and it takes time to alter a lifestyle. Hard things to do when you're punching the clock.

[wzd]

Quote:

But it takes time to decompress from a hellacious working environment, it takes time to develop the inward insight to stop using money as an emotional support tool, and it takes time to alter a lifestyle. Hard things to do when you're punching the clock.

Yes, I can understand that. Did you have confidence that you could do it and be happy at the time you retired? Were you fairly certain the switch in lifestyle was the right thing to do? Two of my peers decided it wasn't and went back to work. I can't understand them, but then they can't see it our way either!

Wayne

[ESRBob]

Quote:

Then for the stuff I found that really mattered, I found quality substitutes that cost 1/10th or 1/2 and were almost as good. But it takes time to decompress from a hellacious working environment, *it takes time to develop the inward insight to stop using money as an emotional support tool, and it takes time to alter a lifestyle. *Hard things to do when you're punching the clock.

Good point, TH. It also takes time to taste all those cheap red wines to find the ones that are really good. And it took me the first 6 months of ER to go through all the recurring charges on my credit card, cancel the dial-up MSN account I never used, drop the unused phone line, change the long distance carrier, analyze the cell phone stuff, dump a few auto-renewing subscriptions etc that saved a bunch of money, too.

I agree that over time you just stop needing to spend the same way -- after I've been hanging around in my slippers and t-shirt posting on this board all afternoon, I don't feel the same need to go to a really chic restaurant downtown, and we go out to pizza or cook in instead.

Still, I don't want to advocate making ER into some sort of poverty track. I got a parking ticket today (sucker cost 20 bucks) and I realized that ER is no good if a parking ticket can ruin my day or wreck my weekly budget, either. I think you can't cut the budget too tight, or you end up swapping work worries and obsession with portfolio or spending worries and obsession, which is no fun either.

[ESRBob]

Quote:

Mark, When you are retired you are no longer paying high income taxes, the mortgage or saving for retirement - So figure you need about 33% to cover living expenses and property taxes. This will be much closer than the 80% number.

I've looked at the 33% thread, too, and you just need to make sure we are comparing apples to apples: if we are talking about what % of pre-tetirement Income you need to spend in retirement, then the number gets low, but if you look at what % of pre-retirement _spending_ then it might not drop so low. A lot of people probably don't think of their savings and their taxes as "Spending" but rather think of spending as the amount of checks they write each month or year for bills.

It is true, though, that we ERs get taxed like 'working poor' if we only earn a little earned income (and hopefully set that off against an S-corp or LLC expenses) and get our money from cap gains, some interest and dividends. I worked out once that earning 100k of income the old fashioned way (and making a few assumptions about sched a deductions) would tax you at 25k (including social security) whereas the ER can live on the same amount of net income and pay about 1/4 as much tax or less.

The key reason is that the ER is spending a combination of interest, dividends and capgains, as well as selling some appreciated assets to make up the actual SWR that he spends each year. Much of the portfolio appreciation, then, sits in the Portfolio and is not taxed until some future point when the money is withdrawn. This is like taxfree compounding in an IRA, only better. The only capgains tax you pay (aside from those in fund distributions) is the capgains on the appreciation in the small portion of assets you sold to raise cash.

Now it is true you paid taxes on those assets when you first earned them, so it isnt exactly a free gift from the govt, but its nice when you are actually doing it. Also, you can pay dividend and capgains taxes at 5% if you are in the 10 or 15% fed income tax bracket, which is a worthy goal for all of us. The salaried worker is usually in a higher bracket for the same amount of annual spending, and his capgains would therefore be taxed at 15%.

My personal figures for state and federal taxes work out something like this, with no benefit assumed from using capgains taxloss carryforwards (which are making my actual state and fed taxes paid zero these past few years):

Taxes paid as a % of portfolio: 0.24%
Taxes paid as a % of income: 5.2% (divs, interest, CG)

This beats the heck out of the salary worker who would be paying more like 20-25% of an equivalent amount of salary as state/fed/ss taxes.

So yeah, your taxes go way down in ER! I get a kick out of some retirement models that show taxation of all portfolio earnings at 33% as if a) all the gains are actually realized every year and b) a retiree actually pays that rate even at the margin! It is calculators like these that keep people at the grindstone.

My only other point on budgets is that we travel more in ER which even with careful shopping on orbitz and jetblue and so forth is still a non-trivial expense, possibly even a larger expense in ER. Also, my hobbies spending went up because with all that time I needed some toys, in my case one toy called a boat which costs more than you wish it would to feed the beast every year but makes ER worthwhile for me.

[cute fuzzy bunny]

Quote:

Yes, I can understand that. Did you have confidence that you could do it and be happy at the time you retired? Were you fairly certain the switch in lifestyle was the right thing to do? Two of my peers decided it wasn't and went back to work. I can't understand them, but then they can't see it our way either! Wayne

I actually did no calculations at all when I pulled the plug. Between a good sized portfolio and some considerable RE assets, and a years pay and benefits being handed to me, I took it as a given that I could pull off "something", and all else failing, simply go back to work a year later after a long paid vacation.

Now after some planning and reallocation of assets, its clear to me that I dont have to "work for a living" anymore, and I dont want to. I can definitely see how some people who are defined by what they "do" or who lack the ability to establish their own purpose or manage their own time can get "ex convicts disease". Lack of structure hasnt ever really been a problem for me, and being able to identify myself without a "career" isnt one either.