Is 80% of income really the right goal in retirement? Explain

[Gumby]

People are remarkably resistant to the idea of tracking their spending, but in my view, that is the single most important thing you can do to plan for retirement. Because it is your actual spending you need to cover in retirement, not some percentage of your income. That one number -- your spending -- should form the basis of all your decisions about saving, investing and timing.

The young wife and I currently live (quite well, I must say) on 38% of our gross income. When we retire in a little over two years, we will easily cover at least double that spending. If our living standards change after retirement at all, it will only be for the better. That has always been the goal -- to live at least as well after retirement as we did before.

 

[meierlde]

People are remarkably resistant to the idea of tracking their spending, but in my view, that is the single most important thing you can do to plan for retirement. Because it is your actual spending you need to cover in retirement, not some percentage of your income. That one number -- your spending -- should form the basis of all your decisions about saving, investing and timing.

The young wife and I currently live (quite well, I must say) on 38% of our gross income. When we retire in a little over two years, we will easily cover at least double that spending. If our living standards change after retirement at all, it will only be for the better. That has always been the goal -- to live at least as well after retirement as we did before.

Basically I just track withdrawals from the checking account, and not in greater detail than that. In particular there is cash that I take out every so often that I don't track it. If you paycheck etc are direct deposited this does work fairly well. Of course this deals with net income and does not include withholding, Social Security, any pretax health insurance contributions etc. But it is fairly simple, just sum the checks you write each month. Then you can get a yearly total by adding up the 12 months that make it up.

 

[RobbieB]

I've never tracked my spending and I never will.

My retired spending is roughly 2X my employed spending and that's a nice comfy level.

And I'm still stackin' dough -

I disagree with the 80% estimate also, 200% is a better number.

 

[Yarnstormer]

Probably depends on what your income is...80% of mine would not cut it, sounds like 80% of your might assuming your pay raises keep up with inflation. I'd advise keep on keeping housing costs in check, maintain a reasonable lifestyle, continue saving as you have been and you will be fine.

 

[scrabbler1]

Add ne to the list of "80% of income is a lot of hooey" people. For me, it is simply, "80% of what?" Twice I reduced my weekly hours worked during my working years. So, which income amount should I use, my full-time salary, my first part-time salary (which was about 53% of my FT salary), or my second part-time salary (which was about 32% of my FT salary)?


When I was putting together my ER plan and budget in 2007-08, I used my current expenses but made the following adjustments: I eliminated my commutation expenses and FICA taxes, and increased my health insurance costs. The reductions and additions roughly offset each other. The rest of my expenses were basically the same. I wasn't contributing to my 401k during my extra-low salary time so nothing changed there.


As others here have written, you don't start with your income and work your way down to your projected expenses. Instead, you start from zero (or, perhaps, your current expenses) and work your way up (or sideways, or down).

 

[2017ish]

I've never tracked my spending and I never will.

My retired spending is roughly 2X my employed spending and that's a nice comfy level.

And I'm still stackin' dough -

I disagree with the 80% estimate also, 200% is a better number.

RobbieB, 200% of pre-retirement Income, or pre-retirement Spending?

I'm guessing the latter. (And I do salivate at many of your posts!)

Big difference. We will/plan_to spend more than our pre-retirement spending. But, given that our post-tax spending is less than 1/3 of our gross, there is no way we will be able to consistently spend 2x last year's gross in retirement.

 

[bob boag]

You kind of need to generate or have available the amount of money that you spend each year. If your capital nets you more than that, all the better.

 

[Backpacker]

Whenever I see an article, or hear an "expert" spout those generalities, I run the other way! As many others have said, It's all about spending, you need to have a good handle on what your expenses are.

 

[pb4uski]

One thing is for sure, the often quoted answer of 75% to 85% of your preretirement income is likely to be as right as the proverbial broken clock that shows the correct time twice a day!

The 75-85% rule of thumb might be appropriate for people who live from paycheck to paycheck and don’t save much for retirement since for such people their take-home pay might be 75% to 85% of income after taxes and other withholdings. However, if someone is making substantial contributions to tax-deferred employer retirement savings plans such as a 401k or 403b or if they have substantial withholdings for IRA contributions even if they spend all of their take-home pay their take home pay would be substantially less than 75% of income.

In the ideal situation, one will have detailed records on actual spending for the last couple years in Quicken or Mint of some similar tool that could serve as a starting point for developing a retirement budget. If such information isn’t available, then you will need to do some analysis of your expenses for the last couple years to get to that starting point. A “top-down” approach would be to take your take-home pay for the year and reduce it for any additional savings you made – presumably the remainder was spent on living expenses. While this approach is a bit crude, it is better than a wild guess.

A more refined approach is to build a “bottoms-up” retirement budget looking at various categories of spending. There are plenty of forms and templates available that can serve as a guide. A broad approach is usually sufficient. For example, we have two vehicles and put about 10,000 miles a year on each. Vehicle 1 gets 20 miles per gallon and uses regular gas that averages $3.50 a gallon. Vehicle 2 get 23 miles per gallon but uses premium gas that averages $3.75 a gallon. So our budget for gasoline for the two vehicles is $3,380.

 

[donheff]

Just to echo others - spending, spending, spending. Take a look at everything you have spent for the last couple of years and then start subtracting. Mortgage? Education and other kids expenses? Investing (this could be a huge one if you are aggressively pursuing FI), taxes (could be way lower for a while if you are tapping taxable accounts for RE spending then go up for RMDs). Then start adding back in. Travel more or less? Health insurance prior to Medicare?

In DW and my cash our spending in RE is quite a bit lower than 80% and we still return some of our theoretical withdrawals to saving even though we travel more now than when employed. The biggest reductions were savings and taxes.

 

[Lakewood90712]

I would say those fit's all estimates fit more than half, but I sure would not recommend it . You need to do some planning and sole searching of what is important. Some people end up spending more in retirement, and that's not even counting medical costs. Tax strategies are another big issue, and every retiree is different.

 

[scrabbler1]

Another big thing I did in my ER planning was to split it into two parts. The first part is budgeting from the start of my planned ER (age 45) through age ~60 and that is the far more important part because I would be using only my non-retirement accounts which are about 2/3 of my overall portfolio. After age ~60, things get much easier because my "reinforcements" begin to arrive at different times. Those are SS, my frozen company pension, and unfettered access to my IRA. Therefore, as long as I can get to age ~60 intact, it will be smooth sailing the rest of the way. I am about half way there from age 45 (I am 53 now) and things are great financially.

 

[dixonge]

Our peak income years were in the $125k range, currently right around $40k (gross). We'll start our retirement on a lower income than that, building back up to around $75k within six years or so. Yet my budget shows us still saving at least $10k/year even in the first couple of reduced income years of retirement. Key factor: living in Mexico.

This is all pension/SS income. The savings are the nest egg/safety buffer, all held in equities. Eventual goal is to have enough to buy a home in Mexico, or to hold back just in case there are issues w/ the pension or SS. Prudence and all...

 

[RobbieB]

You are correct, I was referring to spending, not income. I estimate that I'm a little over twice pre-retirement spending. Makes sense too, when you are retired you have much more time to buy stuff and go places.

RobbieB, 200% of pre-retirement Income, or pre-retirement Spending?

I'm guessing the latter. (And I do salivate at many of your posts!)

Big difference. We will/plan_to spend more than our pre-retirement spending. But, given that our post-tax spending is less than 1/3 of our gross, there is no way we will be able to consistently spend 2x last year's gross in retirement.

 

[YVRRocketSurgery]

my guess is this is not a priority for them.

Just working my way through the thread and thought I'd comment on the why people don't track their spend.

I agree it's likely not a priority.
I think it's also a question of how to go about it effectively. From a very basic perspective, I suppose one can easily review your bank statements and see what your income coming in is, and then calculate using the starting and ending balance of your bank account.

It takes more effort when you want to get more detailed and categorize your spend. You've got cash that's harder to track versus bank and credit card statements. You may have multiple accounts. Etc.

 

[YVRRocketSurgery]

When we cost out a project at work, we do estimates at various stages.
During early analysis to determine if we want to proceed with the project, the cost estimate is expected to be +/-100%.
After we agree to proceed with the project and go to get funding, the cost estimate is expected to be at +/-50%.
Just before we begin work on the project, we expect the cost estimate to be +/-10%.

My point is, the accuracy of how much you need for retirement varies due to various reasons and timeline. When you're just starting to think about retirement, 80% of your income might be a good enough initial estimate. You can get really detailed early on but things may change in your life that throw off your estimates: higher paying job, being unemployed for a while, kids, illness, new goals in life, etc. When I first met with a financial adviser years ago when I was just starting to make some decent coin, and we were working out how much money I needed to retire, I didn't know what my goals in life were.

At this point in life, we're more stable in our jobs & income level, generally know what our goals & passions are, and are pretty consistent in what we spend our money on. It's probably going to give more bang for our time analyzing our current spend to estimate what our targeted retirement spend is and corresponding lump sum required to generate it.

 

[Mdlerth]

When we cost out a project at work, we do estimates at various stages.
During early analysis to determine if we want to proceed with the project, the cost estimate is expected to be +/-100%.
After we agree to proceed with the project and go to get funding, the cost estimate is expected to be at +/-50%.
Just before we begin work on the project, we expect the cost estimate to be +/-10%.

My point is, the accuracy of how much you need for retirement varies due to various reasons and timeline. When you're just starting to think about retirement, 80% of your income might be a good enough initial estimate. You can get really detailed early on but things may change in your life that throw off your estimates: higher paying job, being unemployed for a while, kids, illness, new goals in life, etc.

+1 An exquisite analogy. I wish I had said this.

 

[Gumby]

Just working my way through the thread and thought I'd comment on the why people don't track their spend.

I agree it's likely not a priority.
I think it's also a question of how to go about it effectively. From a very basic perspective, I suppose one can easily review your bank statements and see what your income coming in is, and then calculate using the starting and ending balance of your bank account.

It takes more effort when you want to get more detailed and categorize your spend. You've got cash that's harder to track versus bank and credit card statements. You may have multiple accounts. Etc.

I put virtually everything on a credit card, write very few checks and spend very little cash. I try to use certain credit cards for certain things -- one for gas/groceries, another one for restaurants, and third for everything else. When the bills come, I allocate each item to a category and enter it into my Excel spreadsheet. When I write a check, I add that to the proper category. My cash spending is usually on the same few things -- the barber, the dry cleaner, the house cleaner, and occasionally lunch at work. I usually enter a number for cash spending at the end of each week. All in all, I'd say it is no more than 1 hour to 90 minutes a month total work for me.

 

[respond2u]

One reason to budget is to be more aware so that I can make wiser decisions.

That sort of budget doesn't have to be very precise.

 

[Shanky]

I retired with about 25% of my pre-retirement income. Still 6 digits, but we live on less than what my Fed Tax bill used to be. We had an expensive lifestyle and Kids in high priced Universities & Boarding Schools. Had expensive Large Boat & Expensive Home. Lived in Bay Area CA.

3 years later we are in a low cost area, kids are out of college, boat is smaller & we are enjoying life more than we did when I had a high $$ Career. We did test the water by living on our planned retirement income for a couple years before we pulled the trigger.

Bottom line, 25% of pre retirement income works for us. Note, we only saved for about 10 years.

 

[ERD50]

People are remarkably resistant to the idea of tracking their spending, but in my view, that is the single most important thing you can do to plan for retirement. ...

I guess it depends on your definition of "tracking your spending".

I've never tracked it in the way I think most people mean (itemized list of expenditures), and I've done well, and it didn't seem that important to whatever success I've had.

OTOH, I've always known how much I spend. Income (after deductions for saving) goes in the checking account. Spending comes out. If comes-out-a is greater than goes-in-ta, I'm spending too much. But generally, the cash balance grew, and that got added to savings.


-ERD50

 

[Samething]

Good morning. New to this site.



While I'm only 35 i'm thinking about my financial future and how to appropriately fund for retirement, college, paying off my home, etc....i've always been pretty good with saving but figure now is a good time to start getting a better picture of where things stand.



A couple things i've read said a good target is for 80% of your income in retirement. To me that seems high.



I would be very happy to retire at the standard of living I have now. That said, My wife and I currently save ~12% of my salary in our 401k's. We put ~3% of our salaries into 529's. We put ~12% of our salary towards our mortgage and we still manage to save another 5-6% into shorter term savings (that may go to retirement or may go towards home renovations, vacations, braces, whatever).



These expenses make up about 1/3 of our income and presumably will not exist when I retire. As such i'd think 65-70% of our current salary would be a better target. Am I correct? Or am I missing something?



Obviously it's still better to save than not to save (no need to spend money just for the sake of spending money) and i'm generally happy with our lifestyle at our current budget. But when I start thinking about if i'm saving enough for retirement, or if i can fantasize about an earlier retirement, it's nice to know if i'm using the right numbers in my analyses.



All thoughts/advice/feedback are welcome.



Thanks

Your only 35. Life can have a way of changing your outlook of what you desire for your future. I've always been a saver but when I started seriously planning ER just a few years ago my life was so much different than it is today at 56. My original plan based on tracking my expenses called for about 65% of my salary or 50% of my income. Now I'm not so sure so I continue to work until I figure out how my new reality is going to affect my retirement plans. It's been a most challenging time in my life. Good luck to you.

 

[Big_Hitter]

A couple things i've read said a good target is for 80% of your income in retirement. To me that seems high.

professionals that design pension and savings plans for employers normally use 70 to 80% of final pay as a benchmark when figuring out the formula, match or straight profit sharing amount

obviously when you get down to the individual level each of us has our own story so the rule of thumb may not apply

 

[Tutashen]

I totaly agree with Jrwinfla, what you expect to do at 60 is not going to be what you think it will be at 35,when i was 35 i wanted to sail around the world if i fell off the boat i would swim an catch it beating up any great white that got in the way,today i've been retired since 2012 going on 60 this year ans i wouldnt want to take on a goldfish that was looking the other way lol your plans will change alot,as for money I kept the big house an toys went from about 10000 month to 3100 take home and the only thing i miss is not being able to walk into a car dealership an putting new car on debit card or spending 5 or 10 thousand at xmas on things most people don't even want or need.I did get full medical dental ect with pension so thats one thing to pay attention to ,at this age i spend a good part of my time driving people to doctors appointments or sitting in hospitols and at 35 that never crossed my mind for my two cents think friends and family are going to play huge part in what you actualy do in retirement,and when you retire young i was 55 you can always work an that is like free money because everything is already paid for! I got bored and for two summers worked out of town everything paid for made good money and found out it is possible to get sick of living in a hotel room with a pool an girls in bikini's lmao k I done good luck with life

 

[Surewhitey]

46&52 here. Last year we spent 3+ weeks in Mexico and 2 trips to California. Spent $20k on remodeling the house and we still only spent $60k...80% is way too much for our lifestyle. Last year was identical to this year.

Have always lived on our smaller salary and saved the larger...Never had a rainy day, so we're all set, for now.