Is 55% enough?

[Independent]

When I retired, I figured we could live on my pension which was 31% of my pre-retirement wages. I planned on a substantial cushion. That was a good thing since we have used it for unexpected expenses that we that we didn't have before retirement.

You are certainly going about it the right way, and 55% isn't a surprising number.

 

[REWahoo]

10% nett per month on an investment - 100% safe.
This will raise a few eyebrows I know.
I got so brassed off with all the trash on the net I put together my own schedule.
Comments very welcome.

Enough with the windup, give us the pitch...

 

[bikeknit]

The one thing that I think "rules of thumb" are good for are the people who don't want to run the numbers - or who simply don't have the skills to do so. Having a rule of thumb is better than not thinking about it at all. But as we've all seen from everyone's examples, running your own numbers is much more precise.

 

[Birchwood]

observations.

1. % of what:It all depends on your pre Ret. income. If you earn a lot, a small % of it will do.
2. Standard of living: This is the real kicker. We are used to already spending only a small % of our gross income, so there is not a lot of adjustments there. But if you live like a king, even 100% may not be enough.
3. Travel: Expect to spend a lot in the next few years, & 10K/year sounds reasonable for my frugal sense.
4.Health: Let's hope and pray all of us don't develop an expensive life threatening illness, or else everything is out of the door.
5. Cars: All of our vehicles are fully paid for,with low miles, and plan to drive them for a few years to avoid big expenses. Avoid expensive rides.
6. House: will live in the same house or will buy exactly the same price home during retirement. Will also scale back later in years.

 

[Aiming_4_55]

% of current income is meaningless for a variety of reasons already stated.

I find it more meaningful to understand your living expenses (add taxes), any anticipated major events (50th wedding anniversary reception, new car, etc.) plus cushion, and oh some cushion.

 

[l2ridehd]

I have done all possible income and expense projections. I come out at between 40% and 45% of current income. I have done highest possible expenditures, lowest possible and used the average. I have done all expenses added contingency amount and they all come in between those percentages.

 

[Finance Dave]

Found this related article, which confirms much of what we've been saying.

Retirement savings strategies: Live well on less - Sep. 12, 2011

 

[Brett_Cameron]

My post-retirement gross is 50-60% of pre-retirement gross. This covers 100%+ of projected retirement expenses which are only slightly less than pre-retirement expenses after excluding higher fed tax, all state income tax, savings contributions.

 

[WB52]

Great thread! I have not retired yet either. But I built the same two estimates of my post retirement neads 5 years ago (One based on income, the other based on spending). In my case they both totalled up to about 62% of pre-retirement income. I think I was a bit conservative in assumptions, so actual would be a bit lower. This 62% would provide my current standard of living (financially) and I call it my bare-bones level. I am holding out on retirement until I can afford an 80% level for additional travel, recreation, etc.
Thanks for posting the questions. It is great to see all the other comparisons.

 

[CCdaCE]

Suggest starting with a chart like on this page.
2011 Income Tax Bracket - Marginal Tax Rate

Then you can work up approximate taxes for both income levels (pre/post) as follows.

Let's assume you make $186,000 gross and are married filing jointly...the math looks like this:

10% x 1,700 = $170
15% x (69,000 - 17,000) = 15% x 52,000 = $7,800
25% x (139,350 - 69,000) = 25% x 70,350 = $17,588
28% x (186,000-139,350) = 28% x 46,650 = $13,062
Total taxes = $38,620
In this case, your MARGINAL tax rate (the amount you pay on each additional dollar you earn) is 28%. But your AVERAGE tax rate = $38,620/186,000 = 20.8%

Now assume you rehire (I plan to take a much lower paying part-time job) and make only $40k/year.
10% x 1,700 = $170
15% x (40,000 - 17,000) = 15% x 23,000 = $3,450
Total taxes = $3,620
In this case, your MARGINAL rate is 15%, and your average rate is 9.1%

Your tax savings (I hate to call it savings...maybe call it "reduction" instead) is $38,620 - $3,620, or $35,000. So you'd remove $35,000 from your "income needs" due to lower taxation.

For us the above number is nearly $60,000 instead of $35,000....it will feel so good to get the government out of my pocketbook so heavily.

*Note the above is not perfectly accurate, as it fails to discuss AGI (Adjusted Gross Income), which is what you're really taxed on...but it's an estimate you can use. To get a little closer, simply subtract any pre-tax items (i.e. 401k pre-tax contributions) and the standard deduction from both estimates.

Shouldn't the $170 number be $1,700?

-CC

 

[jIMOh]

First off, let me say "good to see everyone again", as I tend to come and go to the forum...but things are heating up so you may see more of me.

I don't follow the rules of thumb ("you'll need 80% of your pre-retirement income to maintain your lifestyle"), but I want to just check to see if I'm missing anything.

Currently 49 (birthday soon) , married, both of us work professional jobs. currently save ~30% of our gross. Everytime I do a rehirement (yes, I spelled that right) budget, I only can come up showing that I need about 55% of my pre-retirement income...no where near the numbers all these calculators and "experts" use.



Thanks in advance,

Dave

If you save 30% that means you spend 70%, and that 70% is probably gross... (meaning taxed come out of the 70%...), then subtract 6.2% SS and 1.45% medicare and you can see how the 70% starts approaching 55%.

 

[67walkon]

I'm with the % of income is irrelevant folks. As a more or less self employed professional in a small firm, income has varied greatly from year to year. We have lived based on an expense budget that has been generally substantially less than expected income. The expense budget includes 10% of the total to faith based charities and 10% to savings. When extra money comes in, which happens almost every year, we save part and use part to fund infrequent expenses like a new tv every 10 years or so; okay, every 7 or 8 if I have my way. We have generally avoided debt that way and the savings are now substantial.

My wife is already retired at 57 and I'm going part time in a few months. I believe our expenses in retirement will go down, at least after a few years, but I've done the calculations assuming they will go up 3% a year. Of course, I know when the mortgage will be paid off and reduce the expenses by that amount in the pertinent year, but still assume general expenses will continue to rise.

My gut tells me I am being overly conservative but it is better to be safe than sorry. Trying to figure out how to generate 55% or 70% or whatever of our current income is pretty much a waste of time since the relevant number is how much we spend.

But now I'm going to work on that, just to make sure! You guys keep me thinking.

 

[Ed_The_Gypsy]

We had better be able to live on ~25% of my normal income, because that is all we will have.

I think we can do it, once we are debt-free, which is coming closer.

 

[Finance Dave]

oops yes, and the 1,700 should be $17,000, two errors, I'll go back and fix it all...thanks for catching me.

 

[Finance Dave]

Don't see an edit button...how do I change a prior post?

 

[Finance Dave]

If you save 30% that means you spend 70%, and that 70% is probably gross... (meaning taxed come out of the 70%...), then subtract 6.2% SS and 1.45% medicare and you can see how the 70% starts approaching 55%.

Yes, and also the Federal income tax comes out...which is a HUGE amount today, but will be quite small after FIRE.

 

[REWahoo]

Don't see an edit button...how do I change a prior post?

There is a six hour window to edit posts.

 

[Finance Dave]

Doh! Ok, then I'll copy and repost....give me a few.

 

[Finance Dave]

My apologies, but even with an engineering degree and scoring in the 98% percentile in math admissions exams, I still make mistakes. Below is the corrected info.

**********fixed math from earlier
Suggest starting with a chart like on this page.
2011 Income Tax Bracket - Marginal Tax Rate

Then you can work up approximate taxes for both income levels (pre/post) as follows.

Let's assume you make $186,000 gross and are married filing jointly...the math looks like this:

10% x 17,000 = $1,700
15% x (69,000 - 17,000) = 15% x 52,000 = $7,800
25% x (139,350 - 69,000) = 25% x 70,350 = $17,588
28% x (186,000-139,350) = 28% x 46,650 = $13,062
Total taxes = $40,150
In this case, your MARGINAL tax rate (the amount you pay on each additional dollar you earn) is 28%. But your AVERAGE tax rate = $40,150/186,000 = 21.6%

Now assume you rehire (I plan to take a much lower paying part-time job) and make only $40k/year.
10% x 17,000 = $1,700
15% x (40,000 - 17,000) = 15% x 23,000 = $3,450
Total taxes = $5,150
In this case, your MARGINAL rate is 15%, and your average rate is 12.9%

Your tax savings (I hate to call it savings...maybe call it "reduction" instead) is $40,150 - $5,150, or $35,000. So you'd remove $35,000 from your "income needs" due to lower taxation.

For us the above number is nearly $60,000 instead of $35,000....it will feel so good to get the government out of my pocketbook so heavily.

*Note the above is not perfectly accurate, as it fails to discuss AGI (Adjusted Gross Income), which is what you're really taxed on...but it's an estimate you can use. To get a little closer, simply subtract any pre-tax items (i.e. 401k pre-tax contributions) and the standard deduction from both estimates.

 

[MasterBlaster]

There's quite a chasm between how some people would like to live and how they have to live based on their retirement income.

Along those line Dan Airiely asked people far from retirement how (and in what manner) they would like to spend their time in retirement. he then took their responses and figured out an income replacement ratio (ie. percent of final salary) that they would need and it turned out to be 135%.

My personal goal is at least that much. I could (and have) live(d) inexpensively, but wouldn't it be so much more fun to live "the good life".

You can read a little write-up of Dan's research here:

how-much-salary-need--retirement-marketwatch: Personal Finance News from Yahoo! Finance

 

[MasterBlaster]

More of Dan's pearl's...

Savings, security, and spending, and the "when-should-I-retire" question answered all in 1 convienient chart. (Hint: Green is good...)

http://wpfau.blogspot.com/2011/09/dan-ariely-on-spending-in-retirement.html

 

[Finance Dave]

There's quite a chasm between how some people would like to live and how they have to live based on their retirement income.

Along those line Dan Airiely asked people far from retirement how (and in what manner) they would like to spend their time in retirement. he then took their responses and figured out an income replacement ratio (ie. percent of final salary) that they would need and it turned out to be 135%.

My personal goal is at least that much. I could (and have) live(d) inexpensively, but wouldn't it be so much more fun to live "the good life".

You can read a little write-up of Dan's research here:

how-much-salary-need--retirement-marketwatch: Personal Finance News from Yahoo! Finance

yes, this was discussed in another thread recently.

http://www.early-retirement.org/forums/f28/55-80-nay-its-135-a-57850-2.html#post1109933

 

[TheWizard]

I'm late to this thread, but I agree with much that's already been said about running your own numbers and ignoring the percentage rules of thumb.
But it's important to include amounts in your spreadsheet for Asset Replacement. I think I have $500 a month toward a new vehicle and a smaller amount to keep household furnishings and appliances spanking new (kidding just a bit there).

But there's a bigger issue that I've not seen yet in this thread and that has to do with those Big Elephant types of expenses that, for some of us, make retirement an eagerly anticipated goal. My 10-week driving/camping trip to Fairbanks is in that category, as is my month-long Australia trip, neither of which "fit" in my pre-retirement lifestyle.

So all this means is: figure the cost of maintaining a "normal" family & friends lifestyle for 12 months a year. I figured around $45K would cover me for that.
Then add an additional $10K to $20K per person per year to allow for some level of living large. This will vary considerably among folks depending on interests and available funds.

 

[FUEGO]

So all this means is: figure the cost of maintaining a "normal" family & friends lifestyle for 12 months a year. I figured around $45K would cover me for that.
Then add an additional $10K to $20K per person per year to allow for some level of living large. This will vary considerably among folks depending on interests and available funds.

That is how we set our planned ER budget up. Roughly $30k a year to cover basic spending for our family. Then another $5-6k for amortized replacement costs (major home repair/replacements/upgrades and car replacements). Then $10-12k a year for fun and travel. If our portfolio took a big hit and remained depressed for multiple years, we would always trim back the amortized replacement costs and the fun/travel budget a little.

 

[Finance Dave]

I address this in my planning by developing an average over long periods of time. For example, with cars.....I assume we each buy one new car every 8 years.....so I picked a round number below of $32k per car.

$32,000/8 x 2 = $8k/year.

Thus, I've built $8k/year into my annual budget.

Similarly, with vacations....I assume 2 trips per year at $6k/trip. We recently returned from 14 days in Germany, and the total cost was $6,200...so I know that's pretty close for our needs.

IMO what's more difficult is knowing when these types of expenses will "tail off". For example, I won't be going to Germany for two weeks when I'm 82. And most likely by the time we're in our late 70s we'll share one car.

I'm late to this thread, but I agree with much that's already been said about running your own numbers and ignoring the percentage rules of thumb.
But it's important to include amounts in your spreadsheet for Asset Replacement. I think I have $500 a month toward a new vehicle and a smaller amount to keep household furnishings and appliances spanking new (kidding just a bit there).

But there's a bigger issue that I've not seen yet in this thread and that has to do with those Big Elephant types of expenses that, for some of us, make retirement an eagerly anticipated goal. My 10-week driving/camping trip to Fairbanks is in that category, as is my month-long Australia trip, neither of which "fit" in my pre-retirement lifestyle.

So all this means is: figure the cost of maintaining a "normal" family & friends lifestyle for 12 months a year. I figured around $45K would cover me for that.
Then add an additional $10K to $20K per person per year to allow for some level of living large. This will vary considerably among folks depending on interests and available funds.