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

[RobbieB]

That's the correct plan. Save some dough now and worry about how much you will need later. Who knows what will happen in the future?

The magic of long term dollar cost averaging will be in your favor too.

 

[injera]

That's the correct plan. Save some dough now and worry about how much you will need later. Who knows what will happen in the future?

The magic of long term dollar cost averaging will be in your favor too.

Sadly I have some friends in their mid 30s who aren't saving anything for retirement. They have steady jobs and sock away some money here and there but dont have a 401k and dont have any sort of investment strategy.

They either think they can't afford it, won't need it, or can worry about it later. I'm sad to think about what their financial picture will look like when they hit their 60s.

It's never to late to save (my wife for example never had a 401k until we met. 7 years later she's at nearly $200k)

 

[kgtest]

You are young - so your spending now is unlikely to be the same when you reach your financial goals and retire. That said - they may be similar if you retire young, when you have kids.

Maxing out the 401k is important. You mention your employer's contribution as part of the 18k limit... I don't think that's how it works... I maxed out MY contributions to the max - and my employer's contribution was on top of that.

I hear you on the childcare and 529's. My kids are now 14 and 16 - so no daycare... (which was obscenely expensive)... but even without that they add costs to our budget. And even though retired, we're still trickling more money into their 529's each month. The 16 year old is wanting to learn to drive... that will get pricey quick - insurance, gas, a vehicle...

There are two ways to approach what your spending will be in retirement - (and it won't be 80%).
Top down - take your gross pay, subtract out things that won't be there in retirement, and add in things that increase in retirement. So you subtract out FICA taxes, 401k contributions, savings contributions, and work related costs... You add in healthcare increases, and if you plan to travel - you'll probably need to add that in.

Bottom up is where you take all of your annual spending by category (including taxes, healthcare, etc)

When your top down and bottom up numbers are close -then you probably have a good idea of what your real expected spending will be.

Exactly how I approached this problem. In my spreadsheet I have a note each time COL drops... Kid 1 daycare done! Kid2 daycare done! Car Loan Done! Truck Loan Done! Mortgage Done! Those are the major expenses.

but then all of a sudden...Kid1CollegeStarts...and kid2...

 

[kgtest]

Recently visited the villages, FL...worlds largest masterplanned 55+ retirement community. 250,000 people...the ones that saved early and often are retired are on the golf course and the ones that didn't are bagging groceries at the supermarket. True story.

 

[nash031]

Sadly I have some friends in their mid 30s who aren't saving anything for retirement. They have steady jobs and sock away some money here and there but dont have a 401k and dont have any sort of investment strategy.

Even more common in my line of work where most people who plan to stay in for 20 and are in their 30s have a solid pension coming... too few think about whether or not that pension can actually cover what they need, thus many don't have much in the way of savings when they get out, and are thus forced to find another job in order to make ends meet, let alone save for an actual retirement.

Having a pension is a great head start, but it's rarely the end-all-be-all that many assume it's going to be.

 

[injera]

Even more common in my line of work where most people who plan to stay in for 20 and are in their 30s have a solid pension coming... too few think about whether or not that pension can actually cover what they need, thus many don't have much in the way of savings when they get out, and are thus forced to find another job in order to make ends meet, let alone save for an actual retirement.

Having a pension is a great head start, but it's rarely the end-all-be-all that many assume it's going to be.

which is why i'm ruling out social security as part of my retirement planning. If i get a benefit, great. if not, so be it.

 

[injera]

Exactly how I approached this problem. In my spreadsheet I have a note each time COL drops... Kid 1 daycare done! Kid2 daycare done! Car Loan Done! Truck Loan Done! Mortgage Done! Those are the major expenses.

but then all of a sudden...Kid1CollegeStarts...and kid2...

okay i'm glad i'm not the only one who keeps a spreadsheet. i have one (updated annually)

From 1/1/16 to 1/1/17 our retirement accounts are up 22.2% and our net worth is up 31.8%. Excluding real estate our net worth is up 47.7%. Regardless of % i still feel good about things.

 

[nash031]

okay i'm glad i'm not the only one who keeps a spreadsheet. i have one (updated annually)

From 1/1/16 to 1/1/17 our retirement accounts are up 22.2% and our net worth is up 31.8%. Excluding real estate our net worth is up 47.7%. Regardless of % i still feel good about things.

I have one too, dating back now four years. Includes a monthly balance sheet that I review every six months as well as my AA calculator which I use to balance investments across accounts. I recently added the NW and investment tracker graph, and started keeping tabs on annual returns dating back to 2014 so far. Should be interesting to track over the coming years/decades.

 

[nash031]

which is why i'm ruling out social security as part of my retirement planning. If i get a benefit, great. if not, so be it.

Yeah, SS may end up being somewhat irrelevant in that we'll have to fund 15-20 years of retirement prior to SS, and I don't like the idea of needing to rely on SS to make the plan work. As you said, it'll be gravy and additional longevity insurance if it's there by 2040 and after.

 

[Midpack]

Sadly I have some friends in their mid 30s who aren't saving anything for retirement. They have steady jobs and sock away some money here and there but dont have a 401k and dont have any sort of investment strategy.

They either think they can't afford it, won't need it, or can worry about it later. I'm sad to think about what their financial picture will look like when they hit their 60s.

It's never to late to save (my wife for example never had a 401k until we met. 7 years later she's at nearly $200k)

It is a good idea to save beginning as early as possible, though it may not be much early on. Paying off college debt, buying that first house, getting married, having children while building a career which may limit wages early on - aren't challenges any of hope to face later in adulthood. So yes, your 30-something friends should be saving something now (401k match and the like), but it was harder for the 50-70 somethings here when we were younger too.

 

[kgtest]

okay i'm glad i'm not the only one who keeps a spreadsheet. i have one (updated annually)

From 1/1/16 to 1/1/17 our retirement accounts are up 22.2% and our net worth is up 31.8%. Excluding real estate our net worth is up 47.7%. Regardless of % i still feel good about things.

My spreadsheet is OCD.

I am calculating about 50-60% of my current salary as actual living expenses once I lose the car, truck and mortgage payments, daycare etc.

Of course if you include college tuition, that would bump you up closer to the 80% range, assuming you retired early in your 50s with kids in college.

You've done well, our portfolio was only up 9% last year, and our total net worth increased 33%. So it looks like you probably put a little more into your investments and I put a little more into my real estate bucket.

Our annual income is around 140k gross.

 

[injera]

It is a good idea to save beginning as early as possible, though it may not be much early on. Paying off college debt, buying that first house, getting married, having children while building a career which may limit wages early on - aren't challenges any of hope to face later in adulthood. So yes, your 30-something friends should be saving something now (401k match and the like), but it was harder for the 50-70 somethings here when we were younger too.

sure. i get that all those things are critical, but for most people, saving a little is still possible. $10 a week? $50 a week? $5 a week? Yea its far from maxxing out a 401k but it'll add up over time.

 

[DrRoy]

I am now only about 2 months to RE. The way I look at it, I am planning for 100% of my current spending, as I expect to spend more on some things and less on others. After removing particularly saving and some income taxes, full spending will be about 2/3 of my pre-RE income.

 

[Bamaman]

Even more common in my line of work where most people who plan to stay in for 20 and are in their 30s have a solid pension coming... too few think about whether or not that pension can actually cover what they need, thus many don't have much in the way of savings when they get out, and are thus forced to find another job in order to make ends meet, let alone save for an actual retirement.

Having a pension is a great head start, but it's rarely the end-all-be-all that many assume it's going to be.

We were counting on that defined pension for our retirement years. Our Megacofp had one of the premier pension programs anywhere, and their ROE on investments was tops.

Halfway to retirement, Megacorp recognized the defined pension program put too much pressure to perform--and they scrapped it for 401K's only. Only thing you can count on in your future is yourself, and only you are going to take care of yourself. Defined pensions have been on the way out for a long time--and no likely to be around much longer.

 

[nash031]

We were counting on that defined pension for our retirement years. Our Megacofp had one of the premier pension programs anywhere, and their ROE on investments was tops.

Halfway to retirement, Megacorp recognized the defined pension program put too much pressure to perform--and they scrapped it for 401K's only. Only thing you can count on in your future is yourself, and only you are going to take care of yourself. Defined pensions have been on the way out for a long time--and no likely to be around much longer.

My Megacorp has just done away with the pension as we currently know it, though it will still exist in a reduced form in the future for probably fewer people. Of course, my Megacorp is the US Military, so while I am confident that the pension will eventually disappear altogether, I don't believe the government will ever fully revoke it, in particular from those who've already earned it.

Now, two years ago they tried to make a significant reduction in the pensions for people who were already receiving payment by sneaking it through the Congressional budget resolution. It was approved, but when the pension reduction (it reduced the COLA by 1% for the period between retirement and FRA - generally ~40 to 62 for most) came to light, the backlash was so severe that they held a specific vote to remove that from the resolution. And that was just for a savings of ~$600 million...

 

[RobbieB]

I remember "maxing out" my IRA (a whole 2 grand - ) back when they started.

Yup save early and often!

 

[Aerides]

okay i'm glad i'm not the only one who keeps a spreadsheet. i have one (updated annually)

From 1/1/16 to 1/1/17 our retirement accounts are up 22.2% and our net worth is up 31.8%. Excluding real estate our net worth is up 47.7%. Regardless of % i still feel good about things.

Don't get used to it

2016 was a particularly good year overall, coming off a slump for the last part of 2015 and then a nice rally from Brexit forward most of the year.

I do agree at your age a target egg and budget is not the best idea - nail that stuff down when you're about 5-7 years out. Just focus now on saving what is realistic...and actually living too (have some fun).

 

[Just_Steve]

I guess I'm the needle in the haystack. I found this site after I retired, good thing or I would have been scared off of the idea.
I used the percentage of income rule of thumb to plan my retirement.
Details: I have steady POST tax income streams that make up 89% of my POST tax and deduction pre retirement income, at this time I spend 76% of that income. I still carry the same mortgage pre and post retirement. Thankfully I have no cost medical otherwise I probably would be still working.
I am not by any stretch of the imagination saying anything contrary to the sage advice from all the above posters, I am just saying what has worked for me so far early in my early retirement.
I still live the same if not better in retirement.

 

[Taxman59]

For young, lower earning families, an 80% target is a good starting point. If you are a higher earning worker, particularly if you are a big saver, then the 80% drops significantly. If you are a saver, you are probably also a planner who is not afraid of time spent on a spreadsheet or on a retirement planning program. People on this Forum are probably looking at 50% or less of their earnings, and that includes a sizable travel budget!

 

[RetireAge50]

I'm about to retire at 50 and my retirement "budget" is ironically about 80% of my age 35 income but only 40% of my current income.

 

[Teacher Terry]

The cost of health insurance was our biggest shock. It went from being 1200/year to 10k/year. Travel i s our other big cost since we want to do it while we can.

 

[GalaxyBoy]

I remember "maxing out" my IRA (a whole 2 grand - ) back when they started.

Yup save early and often!

+1

Best decision I ever made!

 

[pjigar]

Lot of us on this forums are heavy savers which means the expenses are lot less than 80% number media throws around. They are assuming that you are an average American who spends every penny they earn.

 

[daylatedollarshort]

Instead of looking at our gross income, we looked at our current spending and also the Consumer Expenditure Survey to see what other retired people spent as a starting point:

https://www.bls.gov/cex/tables.htm

We ended up reviewing and optimizing all our expenses, which allowed us to retire much earlier than we previously thought possible.

There is no point in using a rule of thumb like 80% of gross on something important when it is not that hard to make a spreadsheet with planned retirement expenses, and one afternoon of work could possibly shave years off your retirement date.

 

[RobbieB]

Lot of us on this forums are heavy savers which means the expenses are lot less than 80% number media throws around. They are assuming that you are an average American who spends every penny they earn.

That's right and by virtue of my savings and investments I can spend more dough in retirement than I did when I was working and I do -