When you retire, you need less income than before to survive?

[Danmar]

Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?

 

[W2R]

Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?

Either way seems perfectly valid to me, as long as one takes taxes into account one way or the other. .

 

[martyb]

My problem is that I can retire in January on what I bring home (net) now. However, the amount I currently net is AFTER my max 401k contributions of $1875 per month. The 401k isn't going to provide more than about $500 per month @ 4% SWR, so....still trying to decide what to do. Wife works for 3 more years but her income will pay for 100% max to her 401k, so won't be available as income for awhile, and my reserves retirement doesn't kick in until 2018.

 

[Alan]

Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?

Income taxes are lower because of lower income, but while working one also has to pay FICA and Medicare which are taxes only on earned income, so those 2 taxes of ~7.5% disappear altogether on pensions, annuities, interest etc. I consider those to be a genuine expense reduction, as well as lower property taxes if you downsize (as we did).

 

[scrabbler1]

Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?

I split my income taxes into two parts. The first is the income taxes on my "expected" dividend income which I consider an expense. The second is the income taxes on my irregular, cap gains distribution income which I do not worry about covering because the taxes I pay on it come directly or indirectly from the said distribution(s). This falls into your "offset" description.

 

[Danmar]

Interesting. Every year I get a rather large tax refund representing the difference between taxes owing on dividends and interest and my large deduction for alimony, as well as charitable donations. My pension income is paid net of taxes. I include this refund in income and can easily forecast what it will be. I agree property taxes are a straight expense. We don't have taxes like the ones you mentioned that are only payable from active income here in Canada.

 

[NW-Bound]

...Otherwise your largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?

+1, although my taxes are not my largest expenses.

I do include real estate and vehicle taxes however, because these reflect the lifestyle that I chose. If one chooses to have a 2nd home or multiple cars, wouldn't he count maintenance, fire insurance, various operating costs as expenses? Taxes on these assets should be treated the same way.

By the way, I do not bother to count or even think of RE values in my networth however. For that, I count only liquid assets, something that I could convert to good cold cash or Krugerrands with a click of a mouse. If I have rental properties, I would of course think differently as they are income-generating assets, not "sunk costs" that houses now are.

 

[jdw_fire]

Many of you seem to count income taxes as an expense. I do not and never have. It seems much better to me to treat it as an offset to income. Ie income would be after tax. Otherwise you largest expense will be something you don't have much control over. When I think of expenses it is always on an after tax basis. I can only spend after tax dollars. Am I in the minority here?

earlier in retirement i started looked at income taxes the way you say here. i did so because i was receiving income from some hard money lending i did. the return was high so the income taxes would have consumed my entire SWR if i had looked at taxes as an expense. i still look at income taxes that way.

 

[Chuckanut]

I figure my expenses will be about the same overall. I will not be contributing to retirement accounts and SS, which will eliminate one drain on spendible funds.

 

[Nords]

That was dreamed up by some 30 something journalist writing some financial porn for people who want easy answers.

This could be another urban legend, but when I was researching the book I read that the "80%" canard was based on a 1980s study of "work-related expenses". The (unspecified researchers) determined that commuting expenses, business attire, drycleaning, professional equipment, association memberships, childcare, 401(k) contributions, and so forth added up to about 20% of gross income.

Mods, as much fun as it is for every new poster to rediscover this issue, do we have some sort of in-your-face FAQ that they can easily find that will help them avoid asking this question in the first place?

 

[Koolau]

Several points touched on so far:

RE: OP's original question - stated elsewhere in the forum, our expenses are significantly higher in retirement than when w*rking. Primarily, our choice of place to live (plus travel increases) have led to this situation.

RE: Danmar's way of looking at taxes - I've chosen to look at taxes as an expense because taxes ARE (to some extent) manageable. Also, tax rates are not guaranteed, so may be higher in the future (meaning, more planning for that potential expense NOW).

Finally, the OP needs to be aware of the tax implications of having tax deferred money in retirement funds. Managing these funds is important to limit the tax impact.

 

[rescueme]

FWIW, here's a current article on the subject of retirement expenses:

Living to 100? That Will Be $3.5M - SmartMoney.com

 

[Leonidas]

Mods, as much fun as it is for every new poster to rediscover this issue, do we have some sort of in-your-face FAQ that they can easily find that will help them avoid asking this question in the first place?

Second the motion.

 

[marko]

While YMMV, I found that a LOT of expenses went away:
FICA and other employment taxes for one,
Because we don't work we found that:
- We could move to 'pay as you go' cell phones
- Moved from ATT to Vonage
- A LOT less $$ in suits, shoes and other clothing...
- Commuting expenses (gas) went to 10% of our work time

More importantly we found that our TIME was a CURRENCY in that we save thousands of dollars ($5-10K) a year in doing things that we used to pay other people to do that we didn't have the time for.
-Painting
-Yard maint
-Snow removal
-Minor plumbing/elec work
-Car maint

We also had the time to buckle down and learn a lot about our finances and...
1) dumped our financial advisor (1% of our portfolio)
2) dumped our tax guy...hello TurboTax, good bye $800 tax prep

In short, while we were working we solved a lot of 'problems' with our checkbook...now we have more time than money.

 

[audreyh1]

FWIW, here's a current article on the subject of retirement expenses:

Living to 100? That Will Be $3.5M - SmartMoney.com

According to the article:

Once you reach 50 - you've already spent $1.5M
From 50 to 80 - $1.4M
Hey - from 81 to 100 - $630K

So that "extra longevity" only costs $630K.

Thanks for the link. Interesting listing of expenses by age decade. I wish they had given annual totals for each decade - the 90s lists several possible sets of expenses which wouldn't be concurrent - or maybe I'm wrong. It's a bit confusing.

Audrey

 

[Alan]

RE: Danmar's way of looking at taxes - I've chosen to look at taxes as an expense because taxes ARE (to some extent) manageable. Also, tax rates are not guaranteed, so may be higher in the future (meaning, more planning for that potential expense NOW).

Finally, the OP needs to be aware of the tax implications of having tax deferred money in retirement funds. Managing these funds is important to limit the tax impact.

Making Roth conversions in retirement is an obvious example of managing taxes. When I make conversions (2 so far) I pay the taxes out of my savings and treat that withdrawal as an expense just like all other withdrawals, and if that tax payment was going to cause me to exceed my target SWR of 3% I don't believe I would do it.

 

[Finance Dave]

Good article, but a bit misleading as it implies you need to save $2M by the time you're 50 ($3.5M - $1.5M already spent). Obviously each year you are earning more (even if only through investments), and using that to pay current expenses.

Reminds me of the study that said Americans will spend on average $xx on medical care during retirement. Same problem...implies you need that much all at once.

 

[Danmar]

@ Koolau. Yes I agree that taxes must be actively managed and can change ovr time. But if I viewed them as expenses they would move my total spend all over the map. i feek it is the discretionary consumption type expenses like travel, autos, entertainment that I need to manage. The tax expenses will be directly related to decisions I take on my income.

 

[Koolau]

@ Koolau. Yes I agree that taxes must be actively managed and can change ovr time. But if I viewed them as expenses they would move my total spend all over the map. i feek it is the discretionary consumption type expenses like travel, autos, entertainment that I need to manage. The tax expenses will be directly related to decisions I take on my income.

Making Roth conversions in retirement is an obvious example of managing taxes. When I make conversions (2 so far) I pay the taxes out of my savings and treat that withdrawal as an expense just like all other withdrawals, and if that tax payment was going to cause me to exceed my target SWR of 3% I don't believe I would do it.

Obviously, both methods are acceptable and working for both of you (Yeah!!). Your two replies in close proximity got me rethinking my Roth conversions. I still consider the taxes I pay on DW's SS and my pension as "expenses" - IOW, I'll never get that money back. But now I'm wondering if the tax to cover conversions should be considered an expense to count "against" SWR (as Alan does). IOW Roth conversions COULD be looked at as a recognition of the lower value of deferred money. Converted properly (accounting for tax brackets, etc.) the actual value of one's total ER savings doesn't really change - only the numerical values change.

Bah!! Humbug!! I gotta quit thinking so much. That's the danger of learning too much on this forum! But, thanks for both replies.

Returning you now to OP's original question. YMMV

 

[Aiming_4_55]

....Bah!! Humbug!! I gotta quit thinking so much. That's the danger of learning too much on this forum! ...

Thinking too much and crunching numbers is impacting my sleep. I rather consider scenarios than sleep =(

 

[Huston55]

It depends on one's situation. The "80%" that you frequently hear quoted and other rules of thumb commonly assume that you spend your entire take home check, which may be valid for most people, but is definitely not valid for many on these boards.

The best thing to do is to analyze what you spent for the two years before retirement and then make adjustments to that spending for things you think will change.

For us, I think our spending will be about the same as it was prior to retirement (after adjusting for now having only one house rather than two houses).

To early retire you have to be able to save a large portion of your income, 20, 30, 40 or even 50%. So many people on here already live on a small percentage of their income. Then take off all the retirement savings like no mortgage etc and you can get down to really small numbers. I'm looking at needing 30% of my gross income in retirement. Medical costs might go up, that obviously depends on your insurance policy and health, but your retirement plan should account for that increased cost.

OP-

I think these two posts contains contain excellent advice, and when read together, point out an important mechanism that is often overlooked when discussing comparisons of retirement budget versus working income. That mechanism is the often significant income increases one experiences late in a working career. When that occurs, the "replacement rate" method of determining retirement budget becomes even more useless.

Our personal experience is that we currently save a lot more and pay much more (too damn much) in taxes than we did 10 even 5 yrs ago. But, we also "spend" only about 30-35% of our gross annual income.

So, I think PB4's and Nun's advice is good.

1. Calculate spending using a bottoms up method and do a reality check by comparing your recent actual spending history.
2. Save, save, save; and you will get to the point where you're spending a small % of gross income each year.

 

[pb4uski]

You make a good point Huston55 in that if I look at my annual spending in relation to my income during the years just prior to retirement, it was about 30% as well.

Taxes and saving (and some discretionary spending) were making up the difference.

 

[Huston55]

You make a good point Huston55 in that if I look at my annual spending in relation to my income during the years just prior to retirement, it was about 30% as well.

Taxes and saving (and some discretionary spending) were making up the difference.

Same for us now: saving, taxes & spending are the three big categories of where the $$$ go.