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

[injera]

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

 

[Bamaman]

It's so important to fully fund those 401K's as long as your employer's matching amount. From there, funds need to go into Roth IRA's.

With the stock market at an all time high and interest rates at an all time low, being young and funding a retirement is going to be difficult. You'll have to be smarter than my generation and spend more time working your money in a somewhat aggressive but diversified investment portfolio.

Time is on your side. But the potential for inflation and higher interest rates long term is there--eroding purchasing power. My best advice is live far below your means, and save until it hurts. Who knows where the world will be 20-25 years from now.

FYI: In our retirement, we spend just as much as we did prior to retiring--despite having paid for homes and cars.

 

[travelover]

That is overly simplistic. You need to do the work to see where your money goes now and to project how it will be different when retired - no mortgage, no more saving, hopefully no more college / weddings, healthcare insurance costs until Medicare.

 

[injera]

Thanks for the feedback. We do max out our 401k's to the $18k limit (my company puts in ~8%, my wife's only 2%).

My understanding is that we also make too much for a Roth IRA. We manage to put away some money each month but its just in a fidelity account in a target 2050 retirement fund.

I feel that I save pretty well. We just bought a house at about 60% of the cost Wells Fargo thought we could afford. When we left the city for the suburbs we both bought used Honda's (a 2007 Accord for me, a 2013 CRV for her). We probably take too many vacations and go out to dinner too often so money can be saved there, but at the same time, i dont want to be unhappy because i never do anything fun either. Finding the perfect balance is always hard.

 

[6miths]

One could certainly do it on less than 80% especially if you are referring to spending on living. As you pointed out, you should have fewer outflows - retirement saving, mortgage, taxes, child expenses if applicable, other cost related to work, some costs related to housing as well spending tends to go down with age overall for various reasons. If one is a traveler or has aspirations in that area, this is one area where expenses could go up significantly as well as in medical/dental depending on coverage. Generally, I think that most objective sources put the number at closer to 60% but of course it is an individual thing.

 

[Bigdawg]

Thanks for the feedback. We do max out our 401k's to the $18k limit (my company puts in ~8%, my wife's only 2%).

My understanding is that we also make too much for a Roth IRA. We manage to put away some money each month but its just in a fidelity account in a target 2050 retirement fund.

You can do a back door ROTH ira. What you do is fully fund a Tira (you don't get the tax deduction because you make too much) then you turn around in a week or two and convert it to a ROTH. Because you already paid taxes on the Tira money, there is no tax hit. I did this for 2016.

Retirement budget % is different for everyone. Best answer? It depends.

 

[injera]

One could certainly do it on less than 80% especially if you are referring to spending on living. As you pointed out, you should have fewer outflows - retirement saving, mortgage, taxes, child expenses if applicable, other cost related to work, some costs related to housing as well spending tends to go down with age overall for various reasons. If one is a traveler or has aspirations in that area, this is one area where expenses could go up significantly as well as in medical/dental depending on coverage. Generally, I think that most objective sources put the number at closer to 60% but of course it is an individual thing.

Thanks for the feedback. While i'm only 35 i'd certainly think that i'd like to travel more and pick up some new hobbies in retirement (otherwise, i think i'd get bored). The model I used said I'm on track to retire at 65 w/ 80% replacement, but of course i'd love to retire earlier and also a model is just a guideline.

 

[W2R]

That is overly simplistic. You need to do the work to see where your money goes now and to project how it will be different when retired - no mortgage, no more saving, hopefully no more college / weddings, healthcare insurance costs until Medicare.

+1
That 80% rule is baloney IMO. If someone is earning $100K but living on $25K, he won't need $80K to live the same way after retirement, KWIM?

I think a better way to figure out what you will need, is to look closely at what you spend, not at income. So first, you need to keep close track of what you spend for a few years, and what you spend it on. Then you can figure out which of those expenses you won't need in retirement (things like work clothes, commuting costs, and saving for retirement), and which new expenses might arise (things like travel or recreation).

This method is what I used and it worked very nicely for me.

 

[6miths]

Of course the earlier you retire the more wriggle room you will need and allowance for spending likely being higher in the early years and especially before 65. Good point on the hobbies. Hopefully some low cost ones. Avoid F1 racing and the like!

 

[nash031]

80% is a silly thumbrule for people who don't want to do any actual math or put any thought into their retirement, and/or for those who are going to have to work until they are 65 or older to retire. There is no way I will look to replace 80% of my annual income, nor really should most early retirees because most early retirees already live on less than 80% of their income, otherwise they wouldn't be early retirees!


To wit, I'm 39, DW and I have had a gross savings rate of more than 40% of our income since we got married, and that's only dipped this year because we are paying a full-time nanny to watch DD so we can both work. It wouldn't make sense for us to target 80% of our gross income when we lived (pre-nanny) on less than 50% of our gross.


As a couple others mentioned, the only way to get the right answer for you is to track your spending somehow, and see what you really spend. Once you know your current spend level, you can then subtract expenses that go away in retirement (such as savings, maybe mortgage payments, work wardrobe expenses, etc.) and add expenses that arrive in retirement (plus up the travel budget...). From there you can calculate what you need to save based on whatever your retirement funding strategy will be (withdrawals, dividends?, pension?, etc.).


I think for folks like you and me (the relatively young, at least when we start planning), it makes more sense to get a true idea of your spend level, then do the quick math based on a 3-4% withdrawal rate to see what your portfolio level will need to be, and target your savings rate based on your desired retirement age accordingly. Then, when your circumstances change, you adjust fire... I don't think our retirement savings strategy has lasted a full year without some change to what we're saving because, hey, life happens! But we're still on track.

 

[injera]

80% is a silly thumbrule for people who don't want to do any actual math or put any thought into their retirement, and/or for those who are going to have to work until they are 65 or older to retire. There is no way I will look to replace 80% of my annual income, nor really should most early retirees because most early retirees already live on less than 80% of their income, otherwise they wouldn't be early retirees!


To wit, I'm 39, DW and I have had a gross savings rate of more than 40% of our income since we got married, and that's only dipped this year because we are paying a full-time nanny to watch DD so we can both work. It wouldn't make sense for us to target 80% of our gross income when we lived (pre-nanny) on less than 50% of our gross.


As a couple other mentioned, the only way to get the right answer for you is to track your spending somehow, and see what you really spend. Once you know your current spend level, you can then subtract expenses that go away in retirement (such as savings, maybe mortgage payments, work wardrobe expenses, etc.) and add expenses that arrive in retirement (plus up the travel budget...). From there you can calculate what you need to save based on whatever your retirement funding strategy will be (withdrawals, dividends?, pension?, etc.).


I think for folks like you and me (the relatively young, at least when we start planning), it makes more sense to get a true idea of your spend level, then do the quick math based on a 3-4% withdrawal rate to see what your portfolio level will need to be, and target your savings rate based on your desired retirement age accordingly. Then, when your circumstances change, you adjust fire... I don't think our retirement savings strategy has lasted a full year without some change to what we're saving because, hey, life happens! But we're still on track.

Thanks for the feedback. I didnt even think about childcare. Thats another ~8% of our salary (not to mention the cost of diapers, fortunately we're almost done with that). So yes, as we're currently living off of 60% of our salary i dont know if 80% is the right number.

But i guess at the same time, so much can happen over the next 20-30 that makes it hard to predict retirement. My salary could double over the next 5-7 years - or one of us could lose our job and have an extended bout of unemployment. My child could get a full ride to college - or i could have to help a close friend or family member who's on the edge of foreclosure.

Playing with models is fun, but i guess at 35, the goal really should just be to save as much as I reasonably can and be smart with my finances.

It's just scary to think I may need $10M to retire.........i'm maybe 5-6% of the way there.

 

[nash031]

Playing with models is fun, but i guess at 35, the goal really should just be to save as much as I reasonably can and be smart with my finances.

It's just scary to think I may need $10M to retire.........i'm maybe 5-6% of the way there.

This is what I recognized about four years ago when I really started looking at this. When I was in my 20s, I thought a million dollars sounded like a ton of money. Once you see what you need to live off of, all of a sudden you think "I need $10M? Holy crap!", but I seriously doubt you need $350,000 or $400,000 per year to live off of.

If you think you do, then it becomes Money vs. Time, and that's a whole different discussion where most on this forum will tell you that you need to think more about what you want to do with the time you have left. Once you gain that perspective, it's likely that all of a sudden your desired spend will go way, way down, and your final FI number will seem way more manageable. (For me, this discovery coincided with my dad's cancer diagnosis less than two years after he retired at the age of 76...).

Hopefully you'll be able to find a good target number, and hopefully - since you're starting young - you'll be able to devise a strategy that gets you there very early, and then you get to make that choice between time and money. For example, it seems likely that we'll reach our minimum FI number here in a couple of years, and now we're talking about how much we really want to have to spend on travel and such, and is that worth working 2, 3, 8, 10 more years? The unfortunate reality for the vast majority of people - even many with significant income - is that they don't get that choice.

You're right that at 35 you just sock money away (while enjoying your life) and stick to your strategy in the face of market fluctuations, and worry about the smaller details as you approach a few years of your actual retirement.

 

[athena53]

I'm living on about half my pre-retirement income. I was paid well but, like many others here, stashed a lot of it away. I could cut back further if necessary but I donate generously to charity, do a major trip every year (Central America this year and India in 2018) and occasionally buy a piece of real jewelry. (Well, late DH's wedding band deserves nothing less than a platinum chain, right?)

If I'd needed to have 80% of my pre-retirement income I wouldn't be retired yet.

 

[FIREmenow]

I think the intent was originally 80% of your spending, and "they" were assuming you are spending everything you earn.

80% of my spending sounds about right to me for what we will need (with discretionary extra).

However, we are currently spending only 47% of our income.

 

[Midpack]

Like others have said, 80% is a grossly oversimplified rule of thumb. Each of us will need to look at what we're actually spending, especially in the 5-10 years before retiring - and then think about how those expenses will change to provide the retirement you envision. Some people stay about the same, some spend more (on travel for instance), and some spend less as mortgages, children's education, etc. go away. OTOH, medical expenses can increase as we age, especially near the end.

You'll have to do your own calculation like all of us:

What May Cost Less

• You’ll probably paid off your mortgage, if not inflation probably made it feels like a lot less.
• You’ll probably finished paying for your children educations.
• You’ll probably pay less taxes on your income
• Because you no longer work:
  • You’ll spend less eating out — i.e., breakfasts and lunches
  • You’ll spend less on transportation
  • You’ll spend less clothes and dry cleaning costs

What May Cost More

• You’ll continue to pay more on home maintenance costs, insurance, and property taxes throughout your retirement
• You’ll continue to pay more on car insurance
• Your utility bills may increase if you stay at home more
• Travel & entertainment
• Medical expenses

 

[W2R]

I think the intent was originally 80% of your spending, and "they" were assuming you are spending everything you earn.

80% of my spending sounds about right to me for what we will need (with discretionary extra).

However, we are currently spending only 47% of our income.

I can sure relate to spending less than one's income. During the accumulation phase, I was "living like a student" and only spending about 25% of my gross income. That was my choice because I wanted to retire ASAP and hadn't properly prepared for it earlier.

Now that I am retired, I am spending much more than I did back then, as planned. An 80% rule of thumb would never have worked out for me.

I think the only thing these rules of thumb are good for, is providing income for the person writing the article. Everybody wants an easy solution, so they get a lot of clicks on these articles and the ad revenue follows.

 

[respond2u]

Yet another vote for "balony" on 80%.

Decreased costs:
-reduced /eliminated federal and state income taxes. >20% based on your income (too much for Roth)

- eliminated payroll taxes. >7% if W-2, > 15% if self employed.

- daily living expenses, assuming you are like me and optimize my free time when I work (take the toll road, eat out lots, no comparison shopping, maid, lawn man, etc)

- no need to save for retirement. > 10%

- travel, possibly

Increased costs:
- health insurance
- travel, possibly

Travel costs can go way down if you spend some time travel hacking. Lots of examples out there. Try Root Of Good for a man with a family who lives frugally.

Do a budget now, and see what you're spending stuff on that could change.

 

[2017ish]

....

Playing with models is fun, but i guess at 35, the goal really should just be to save as much as I reasonably can and be smart with my finances.

....

I'll join the chorus. Yeah, 80% is not of much use in planning (even more so if it is of pretax income). Thinking back to the dark ages of the mid-90s when we were your age, we were continuing to consistently max out 401k/403b and DW's pension/profit sharing contributions (IRAs were not very attractive at that point). That has ended up putting us in a good position in our mid-50s.

Given the inevitable life changes ahead of you, aggressive saving and prudent expenditures are the things you can control. (But remember to have some fun along the way!)

 

[exnavynuke]

If you want to retire early, the "normal" rules of thumb really don't apply at all imo. They're made for "normal" people with "normal" habits. That 80% essentially says "you're going to save some money from not going to work and you've probably paid off your house by now, so that should be about 20% of your spending gone in retirement". Keep in mind, most people don't have any net worth to speak of, most people's retirement savings is somewhere between "none" and "yeah, I put a couple percent into the 401k to get a match". For those people, 80% is generally a pretty reasonable rule of thumb. For people putting away 20%, 40%, 60% of their income in retirement savings alone, the 80% rule is way off.

 

[DEC-1982]

Well, a lot of people don't know what they spend annually, so for them the 80% rule is a starting point. It's better than having no clue whatsoever.

But as just about everybody in this thread has said, you can do much better using your expenses as the baseline. The average annual expenses during the last 5 years before retirement MIGHT serve as a good baseline. Note that sometimes expenses get hidden, for example, the corporate medical insurance "gift" to some people and it's not even taxed directly (well all of us pay for it indirectly).

 

[Midpack]

Well, a lot of people don't know what they spend annually...

Any good reason why?

 

[DEC-1982]

Any good reason why?

my guess is this is not a priority for them.

 

[rodi]

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.

 

[Aerides]

The 80% rule, like most "common" retirement theories, doesn't account for anyone with an ER plan.
It's a broad average.. But the average person doesn't save very much and isn't even thinking ER. They are doing their company match, maybe a little more, and depending on retiring and going right to SS and 401k distributions.

For at least the last few years before ER, we were saving the full 401k allowance, and full HSA, and then putting about half our post-tax paychecks into other savings. Probably our budget ran about 30% of our gross income, if that.

 

[injera]

Wow. a lot to come back to after lunch.

- re our 401k. we each put in 18k plus get the employer match. while our additional savings may increase/decrease over time, maxing it out is something i hope to do as long as i work.
- we are still saving in other vehicles and have about $125k in additional savings. we try and put 2/3 of all bonuses into savings as well. Would hope this becomes part of our retirement portfolio but who knows what the next 20-30 years will hold.

I appreciate all the comments about 80% being a poor guideline. I guess for someone who knows little about saving for retirement its better to have a (poor) benchmark than to just be guessing. I realize that while I still have a lot to learn, i probably still know more than most of the general public about personal finance.

80% may not be the right number for me when i can start thinking more clearly about retirement. Even in a perfect world i'm sure i'm still working into my mid 50s so i'll remember that stressing out about it now isn't going to do any good. I'll keep socking away as much as I can and when the time gets closer start thinking about when/if i can retire.

thank you everyone for the feedback. glad i found this forum. think i'll stick around a bit