Is 80% of current income replacement needed?

[Donny68]

Hi! I'm new to the early retirement world. I have been saving as much as I could but always just assumed if I saved more than recommended things would work out.

I work in financial services so my 401k is operated by the company I work for. When I log in to my 401k it has all sorts of graphs and estimates that point my way to having at least 80% of my current income available every month after I retire.

This has me thinking, do I really need 80% of my current gross? I have been putting 6% into my 401k and 14% into a Roth 401k for a few years now (since I realized I could escape early). A few months ago I changed it to 10% in my 401k, 9% into the Roth 401k, and maxing out a Roth IRA. I get a 6% company match on the regular 401k along with an annual 0-3% profit sharing contribution that is almost always 1%.

Just through my employer I already have 26% going towards retirement and my Roth IRA on top of that. I know the employer match shouldn't be counted as a gross income reduction for me but why would I need 80% of my current income when I retire when my real life current available gross income is already less than 80% of my full gross? When I retire I likely wont still be contributing to any retirement accounts so I don't see how this 80% estimate they are giving me could be accurate.

Is there a better way to find out a % that I could use. Who knows how taxes will work out for me but I just cant wrap my mind around how my income in retirement would need to be that high when it doesn't need to be that high right now. I am 31 and I am pushing to retire in my mid 50's but earlier would be great. I have 76,963.16 in the 401ks combined and 7,676.36 in the IRA. My wife and I will be starting a normal investment account near the end of the summer. The wife has a defined benefit plan that is similar to a pension and she also maxes out an IRA.

I have looked at firecalc but I am probably too far away from retirement for that to give me any clear idea of what I need

I should say my employer just recently sent out an article praising active investing, that they happen to offer. Seems like a sales pitch... The info they are giving me could just be a way to get people to give more.

Any advice would be appreciated! thanks

[travelover]

You need to look at your fixed expenses and estimate what your expenses will be in retirement. For example, no more mortgage (hopefully), no more FICA, kids college paid for, no longer saving for retirement. Add in medical insurance and new costs, like travel. A good start is to review the last year's expenses to get a handle on where it currently goes.

Percent of current income means nothing.

[W2R]

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.

[Meadbh]

Welcome to the forum.

The simple answer to your question is NO. There is no inherent correlation between income during one's career and expenses during retirement. This 80% (70% is also a commonly used percentage) is a heuristic that assumes that one is spending one's entire paycheque and that expenses will decrease by 20% in retirement. These are not valid assumptions for most of us.

The key to estimating expenses in retirement is to estimate current lifestyle expenses, and extrapolate from that to project estimated expenses in the future. For example, if I am working for a salary of $100K, paying $20K in taxes, saving $20K, paying professional expenses of $10K, commuting at a cost of $5K, spending $5K on a business wardrobe, and spending the remainder on day to day living expenses, my annual lifestyle expenses are $(100-20-20-10-5-5) = $40K. Assuming I live in exactly the same way after retirement, that's how much I will need, plus sufficient to pay taxes (which may be significantly lower after I stop earning). Of course, when I have more time, I may spend more on travel, entertainment, sports, etc. I just have to budget for that.

I used to be a high earner ($300K+). I always saved at least $60K per year, up to $100K. Most of my expenditures while working were professional expenses or taxes and my personal lifestyle expenses were $40-50K. In ER, I spend ~$60K on lifestyle expenses (increased due to inflation).

[OldShooter]

Of course you won't need 80%. The trouble with rules of thumb is that one size fits none. You've already identified your (excellent!) high savings rate as a reason you might need less. You might, also, need more if you want to do a lot of travel in retirement. And, from year to year your needs will change. So I would say: Don't worry about it. You're on a good trajectory and you'll find out the answer to your question after you retire.

You can also do a bottom-up calculation as @W2R suggests. That will give you one more data point for forecasting your needs, but it will not be the exact right answer either. As they say: "No plan survives first contact with the enemy."

Quote:

Originally Posted by Donny68 ... I should say my employer just recently sent out an article praising active investing, that they happen to offer. Seems like a sales pitch...

Your employer is your enemy. Too bad.

As a fiduciary for your 401K, they should be offering at least one inexpensive passive equity fund. If they don't, I would complain to HR using the f-word (fiduciary).

[daylatedollarshort]

We looked at the 65+ households in the Consumer Expenditure Survey for a baseline idea of retirement expenses and then adjusted those amounts for our lifestyle and cost of living area. We were living on less than 80% of our income before retirement while paying into SS, saving for retirement, supporting kids at home, incurring commute and job costs, etc. so despite what a mutual fund FA tried to tell us we didn't need 80% after retirement. The more households save the more the investment industry can make off their portfolios so it is their own interest to have people save more than they might actually need to retire.

[Walt34]

Quote:

Originally Posted by travelover You need to look at your fixed expenses and estimate what your expenses will be in retirement. For example, no more mortgage (hopefully), no more FICA, kids college paid for, no longer saving for retirement. Add in medical insurance and new costs, like travel. A good start is to review the last year's expenses to get a handle on where it currently goes. Percent of current income means nothing.

Exactly. What matters is what you spend and depending on your age and how your life is structured you may have no idea of what your retirement expenses may be. If you're single, getting married and then having children will drastically change that number. If you want to live in NYC or southern California your expenses will be higher than in Ohio or Mexico.

There are so many variables that it is impossible to say what percentage a given person will need.

[exnavynuke]

As said, add up what you spend each year, then subtract expenses which would go away in retirement (stuff associated with work), then add in new costs (like additional costs for health insurance premiums assuming you're not paying 100% of those currently), and that's what you need if you plan to maintain the same lifestyle as you have now.

80% is a rule of thumb loosely based on "dropping some costs of work and maybe paying off the mortgage for most people", and retiring when you're at normal retirement age (so medicare etc is available).

For FIRE, most of the 'rules of thumb' don't work out very well as they're not designed for people who aren't spending all their income currently or who are expecting to retire while still "of working age" etc.

I save 40%+ of my income, so I'm living off less than 60% currently, so retirement expenses would have to go up a decent amount for me to be spending 80% of my current income..

[nvestysly]

Hello, welcome to the forum. This source of information is very useful and helped me retire at 52. Best wishes in your quest for FIRE.

80% of your existing salary may be a good starting point but as others have said it's really all about expenses. I made the same salary as the engineer sitting next to me but his expenses were high and mine were low. Even if we saved the same amount and had the same in our retirement accounts I retired (low expenses) and he didn't (high expenses).

DW and I have been tracking every penny we spend since early 2000. By the time we decided to retire (with the help of FIRECalc) we had a very good idea of what we spend day-to-day, monthly and annually. That made our "guesstimates" for retirement reasonably accurate. While you may not need or want to track expenses down to the penny you'll need something more useful than 80% of salary to decide on FIRE.

Somebody else mentioned taxes. It's true, but often overlooked that you won't be paying payroll taxes. In addition, your state and federal income taxes will also likely be lower than you expect. Can't comment about local income taxes - never experienced that. Income generated from investments is generally taxed in a favorable manner (at least currently) so you likely won't find yourself in a high tax bracket. I know several people that retired when I did and they have much more income than me and they still pay less than 10% in state and federal taxes.

Let me add another component to the equation... You may find yourself with quite a bit on money in pre-tax retirement accounts and wonder how can you access that without the dreaded early withdrawal penalty. Do some research on Substantially Equal Periodic Payments via the 72(t) rule. When I learned about this it changed my life!

[scrabbler1]

It's all about expenses, as others have written.


When I was putting together my ER plan back in 2007-08 in preparation for a late 2008 ER, I began with my current expenses and made 3 main adjustments. I eliminated commutation expenses, I eliminated FICA (payroll) taxes, and I increased my health insurance expenses. And to my small surprise, everything came about even compared to before. My other expenses rose a little or fell a little, but nothing big in either direction.


If you plan on retiring before you turn 60, you will need to have a lot of money in your non-retirement accounts so they can hold you over until you gain unfettered access to your IRA. You may be able to gain access to them a few years earlier if, say, you leave your job at 55 and can begin withdrawing from your 401k. And there is the 72t rule as another poster mentioned.


I retired at 45 so I had to have a LOT of money in my non-retirement accounts which have been carrying me for the last 9 years and will carry me until at least 59.5.

[bw5972]

Quote:

Originally Posted by Donny68 Hi! I'm new to the early retirement world. I have been saving as much as I could but always just assumed if I saved more than recommended things would work out. I work in financial services so my 401k is operated by the company I work for. When I log in to my 401k it has all sorts of graphs and estimates that point my way to having at least 80% of my current income available every month after I retire. This has me thinking, do I really need 80% of my current gross? I have been putting 6% into my 401k and 14% into a Roth 401k for a few years now (since I realized I could escape early). A few months ago I changed it to 10% in my 401k, 9% into the Roth 401k, and maxing out a Roth IRA. I get a 6% company match on the regular 401k along with an annual 0-3% profit sharing contribution that is almost always 1%. Just through my employer I already have 26% going towards retirement and my Roth IRA on top of that. I know the employer match shouldn't be counted as a gross income reduction for me but why would I need 80% of my current income when I retire when my real life current available gross income is already less than 80% of my full gross? When I retire I likely wont still be contributing to any retirement accounts so I don't see how this 80% estimate they are giving me could be accurate. Is there a better way to find out a % that I could use. Who knows how taxes will work out for me but I just cant wrap my mind around how my income in retirement would need to be that high when it doesn't need to be that high right now. I am 31 and I am pushing to retire in my mid 50's but earlier would be great. I have 76,963.16 in the 401ks combined and 7,676.36 in the IRA. My wife and I will be starting a normal investment account near the end of the summer. The wife has a defined benefit plan that is similar to a pension and she also maxes out an IRA. I have looked at firecalc but I am probably too far away from retirement for that to give me any clear idea of what I need I should say my employer just recently sent out an article praising active investing, that they happen to offer. Seems like a sales pitch... The info they are giving me could just be a way to get people to give more. Any advice would be appreciated! thanks

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%.

[Curmudgeon]

80% is a stupid rule, period. Your expenses are (more or less) unrelated to your income, and your expenses in retirement are not at all the same as your expenses during your working years.
Start with what your expenses are now, make whatever corrections you think appropriate for your retirement scenario, and go from there.

[Donny68]

Quote:

Originally Posted by OldShooter Your employer is your enemy. Too bad.

I had a feeling they were my enemy but they do offer other plans

[CardsFan]

Donny68:

IMHO you are on the right track by saving 20% to 25% of your income (plus the company match), but you are too far away from retirement for any estimate of what you will spend to be accurate. In this case the 70% to 80% of income provides you a fair target to shoot for, but it is only a target.

At the age of 31, between now and retirement you will have a lot of changes in both your spending and your income: Children? a mortgage? college costs? raises? bonuses? job growth? job reduction?

So, for now, watch expenses, pay yourself first, save bonuses instead of blowing them, and have some fun along the way. You can LBYM without living like a pauper.

FWIW, You will find most retired posters here live on significantly less than 80% of pre-retirement income, but there are some that have saved enough to spend MORE than 100%.

In my case we spend less than 50% of our last full year of income. BUT, if I compare that to our inflation adjusted income at age 31, it is about 90%!

[ER Eddie]

No.

[W2R]

Quote:

Originally Posted by daylatedollarshort We looked at the 65+ households in the Consumer Expenditure Survey for a baseline idea of retirement expenses and then adjusted those amounts for our lifestyle and cost of living area. We were living on less than 80% of our income before retirement while paying into SS, saving for retirement, supporting kids at home, incurring commute and job costs, etc. so despite what a mutual fund FA tried to tell us we didn't need 80% after retirement. The more households save the more the investment industry can make off their portfolios so it is their own interest to have people save more than they might actually need to retire.

Another reason I would be surprised if you spent 80% after retirement, is the great fun you happen get out of finding bargains, coupons, and so on. Not everyone would enjoy searching for bargains as much as you do, and yet doing this is saving you a lot of money. What a great pastime. Anyway, it's a win-win sort of thing for you because you obviously have lots of fun doing it, AND it saves you considerable money. This is one of those individual differences that proves that rules of thumb can't possibly apply to everyone.

[OldShooter]

Quote:

Originally Posted by Donny68 I had a feeling they were my enemy but they do offer other plans

Good. If they were not your enemy, though, they would not be touting a strategy that has been statistically proven to be a loser so many times that reading the studies has gotten boring.

The only purpose of active investing is to enrich the fund companies and the portfolio managers. Don't stand near the exits. That thundering herd you hear is major pension fund managers, like the state of PA, running for the doors. Pennsylvania Treasurer makes move to passive investment of state funds | PennLive.com

Also: http://www.investmentnews.com/articl...gh-for-calpers

[brucethebroker]

Quote:

Originally Posted by travelover You need to look at your fixed expenses and estimate what your expenses will be in retirement. For example, no more mortgage (hopefully), no more FICA, kids college paid for, no longer saving for retirement. Add in medical insurance and new costs, like travel. A good start is to review the last year's expenses to get a handle on where it currently goes. Percent of current income means nothing.

+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!

[euro]

Quote:

Originally Posted by travelover You need to look at your fixed expenses and estimate what your expenses will be in retirement. For example, no more mortgage (hopefully), no more FICA, kids college paid for, no longer saving for retirement. Add in medical insurance and new costs, like travel. A good start is to review the last year's expenses to get a handle on where it currently goes. Percent of current income means nothing.

+3 - it's already been said: no correlation. In fact, I spend significantly LESS THAN 25% of my final year salary in retirement.

[jollystomper]

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.