dory36
Early-Retirement.org Founder, Developer of FIRECal
- Joined
- Jun 23, 2002
- Messages
- 1,841
An offline discussion bears repeating here. Add your own thoughts, please!
I certainly agree. I think it is posted somewhere here, but we discussed this a while back.
Think about it -- after retirement, you are probably debt free (or probably should be - my soapbox item), so mortgage interest, car loan, etc are probably gone. Call that 25% of typical gross income.
You also are no longer saving for retirement, through salary deductions for a 401k, through Social Security, and through after-tax personal savings and investments. That's probably another 25% of your pre-retirement gross income.
So you're already down over 50% of your previous gross.
Let's say you were making $100,000 gross, and now can live the same lifestyle spending some $50k less. I
Well, that's not all. That $100k gross was taxed - let's say at an effective rate of 20%.
If you made $100k before, and spent or saved $50k on items no longer applicable, and spent $20k on taxes, you really lived on $30k, for those things that will continue past retirement.
Now, you'll probably manage your IRA withdrawals to take out at least the amount of your annual "tax free" amount -- probably $15,000 or so -- to avoid losing that annual deduction forever.
If you continue the same $30k "lifestyle expense" as before with no reduction, you'll probably take another $15k from post-tax sources -- your personal savings and investments -- so the tax is already paid on all but the growth or interest component. So tax becomes a 2-3 thousand dollars, not twenty or so.
Bottom line: if you pay off the mortgage and car(s) at retirement, your spending drops to about 33% of your previous gross, with no appreciable change in your lifestyle.
That doesn't even factor in that you are no longer driving to work, having suits cleaned for daily wear, and so forth. Maybe one less car, and associated insurance, maintenance, and tax costs?
Little things start showing savings. Your drive distance to work is a factor in insurance rates, so that will be lower (but be sure to let your agent know, or you'll never see the reduction).
I'd better stop. I'll repost this on the public board so others can chime in!
Dory36
I think the finance folks at 70-90% of current income is way off the mark
I certainly agree. I think it is posted somewhere here, but we discussed this a while back.
Think about it -- after retirement, you are probably debt free (or probably should be - my soapbox item), so mortgage interest, car loan, etc are probably gone. Call that 25% of typical gross income.
You also are no longer saving for retirement, through salary deductions for a 401k, through Social Security, and through after-tax personal savings and investments. That's probably another 25% of your pre-retirement gross income.
So you're already down over 50% of your previous gross.
Let's say you were making $100,000 gross, and now can live the same lifestyle spending some $50k less. I
Well, that's not all. That $100k gross was taxed - let's say at an effective rate of 20%.
If you made $100k before, and spent or saved $50k on items no longer applicable, and spent $20k on taxes, you really lived on $30k, for those things that will continue past retirement.
Now, you'll probably manage your IRA withdrawals to take out at least the amount of your annual "tax free" amount -- probably $15,000 or so -- to avoid losing that annual deduction forever.
If you continue the same $30k "lifestyle expense" as before with no reduction, you'll probably take another $15k from post-tax sources -- your personal savings and investments -- so the tax is already paid on all but the growth or interest component. So tax becomes a 2-3 thousand dollars, not twenty or so.
Bottom line: if you pay off the mortgage and car(s) at retirement, your spending drops to about 33% of your previous gross, with no appreciable change in your lifestyle.
That doesn't even factor in that you are no longer driving to work, having suits cleaned for daily wear, and so forth. Maybe one less car, and associated insurance, maintenance, and tax costs?
Little things start showing savings. Your drive distance to work is a factor in insurance rates, so that will be lower (but be sure to let your agent know, or you'll never see the reduction).
I'd better stop. I'll repost this on the public board so others can chime in!
Dory36