35% is the new 70%

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35% is the new 70%

Postby k66 » Wed Jul 24, 2013 9:34 pm

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Setting your savings target is one of the most important yet least understood questions in retirement planning.

Expert estimates on what percentage of your pre-retirement income you will spend in your elder years — which crucially determines how much you need to save — vary widely. Some suggest you need to save enough to give you an annual retirement income of 70% of your pre-retirement income.

We think you need much less to get by, perhaps even half that 70%.

If you take into account that spending habits are very different before and after retirement for most people, we think 70% is vastly overstated.


http://business.financialpost.com/2013/ ... you-think/
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Re: 35% is the new 70%

Postby wjo » Wed Jul 24, 2013 10:12 pm

Sounds like an article designed to give hope to those who haven't saved enough.

If 35% of pre-retirement gross is a floor for spending, then that may be correct. But 35% as an amount that is what people aspire to sounds wrong. It may reflect the reality that people who are working and finish paying the mortgage and getting the kids through school start saving a tremendous amount late and life and only have enough to retire on 35%. But those facts sure don't sound aspirational.
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Re: 35% is the new 70%

Postby momar » Wed Jul 24, 2013 10:14 pm

wjo wrote:Sounds like an article designed to give hope to those who haven't saved enough.

If 35% of pre-retirement gross is a floor for spending, then that may be correct. But 35% as an amount that is what people aspire to sounds wrong. It may reflect the reality that people who are working and finish paying the mortgage and getting the kids through school start saving a tremendous amount late and life and only have enough to retire on 35%. But those facts sure don't sound aspirational.

Or it could be that the numbers we traditionally hear are way off base. Almost no one could ever retire if we were to listen to some folks, and yet almost everyone has been doing so for years.
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Re: 35% is the new 70%

Postby matonplayer » Wed Jul 24, 2013 10:23 pm

Your percentage of income is irrelevant. What matters is your percentage of spending.
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Re: 35% is the new 70%

Postby joe8d » Wed Jul 24, 2013 10:41 pm

71. Retired since March 2004 and living on 35% of post retirement gross.
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Re: 35% is the new 70%

Postby twacapt » Wed Jul 24, 2013 11:11 pm

Not true. I have been retired for 10 years and my wife and I spend 80 - 90% of pre retirement income. If you want to enjoy retirement, you will want to travel, enjoy some hobbies and do some things you never had time for before....new golf clubs, fishing boat, learning to fly a light airplane.....perhaps snowbird in Florida for a couple months, etc. These additional expenditures will more than make up for the money you save in not commuting, buying suits or other clothes, plus other expenditures associated with work.
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Re: 35% is the new 70%

Postby madbrain » Thu Jul 25, 2013 2:34 am

This is one strange chart.

I see a few oddities.

Do people really save nothing at all for retirement at age 40 ?

What about the people who spend more than 100% of income in some years ? They don't seem to be represented. I know this has happened to me. But I suppose they may not show in the averages. And no, I'm not even talking about long-term debt like a mortgage (or even a car loan), just splurging on some large purchase and paying cash out of savings, putting one "in the red" for the year.

Why do child costs continue all the way until 65 ? This is a serious question as someone without kids. Don't the kids ever become self sufficient ? I suppose this may account for the different parenting ages. But it's sure strange that nobody seems to have any child costs before 35.

Paying off the home seems to be one pretty much very high constant. It seems nobody ever pays off their home.

Healthcare is nowhere to be found, yet it has to be a significant part of spending, one way or another. What does it fall under ? Regular consumption ?

I don't think the 70% is vastly overstated, but I'm quite sure that 35% is vastly understated, unless everybody on the chart is paying off their home exactly at age 65, cutting off their kids the same day, their income drops so much after retiring that they no longer owe any taxes, and they never get sick.
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Re: 35% is the new 70%

Postby curiouskitty » Thu Jul 25, 2013 4:26 am

madbrain wrote:This is one strange chart.


+1. I agree with several of the things you pointed out and I also can't figure out what to make of the "Higher Incomes Taxes" slice. Higher than what?
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Re: 35% is the new 70%

Postby Sheepdog » Thu Jul 25, 2013 5:28 am

matonplayer wrote:Your percentage of income is irrelevant. What matters is your percentage of spending.

Absolutely!!
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Re: 35% is the new 70%

Postby Call_Me_Op » Thu Jul 25, 2013 6:39 am

These "expert estimates" are meaningless.
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Re: 35% is the new 70%

Postby ofcmetz » Thu Jul 25, 2013 7:21 am

curiouskitty wrote:
madbrain wrote:This is one strange chart.


+1. I agree with several of the things you pointed out and I also can't figure out what to make of the "Higher Incomes Taxes" slice. Higher than what?



People apparently don't have kids until age 35, or save for retirement at age 40, or cut the kids off financially ever. :D
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Re: 35% is the new 70%

Postby dickenjb » Thu Jul 25, 2013 8:16 am

matonplayer wrote:Your percentage of income is irrelevant. What matters is your percentage of spending.


Bingo. I have said for years 70% of preretirement income is rubbish. What you need is 100% of postretirement spending. And that varies so much from person to person as to make % of preretirement income rules of thumb total rubbish.
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Re: 35% is the new 70%

Postby scrabbler1 » Thu Jul 25, 2013 9:02 am

dickenjb wrote:
matonplayer wrote:Your percentage of income is irrelevant. What matters is your percentage of spending.


Bingo. I have said for years 70% of preretirement income is rubbish. What you need is 100% of postretirement spending. And that varies so much from person to person as to make % of preretirement income rules of thumb total rubbish.


Yup! As someone who retired in 2008 at age 45, what mattered the most was projected spending. My previous income was irrelevant, especially when I took a voluntary pay cut (in exchange for a reduction in weekly hours worked) not once but twice in the 7 years before I fully retired. So if someone said to me, "70% of your pre-retirement income," my replay would have been, "70% of WHAT?"
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Re: 35% is the new 70%

Postby MnD » Thu Jul 25, 2013 9:49 am

Five years out from early retirement I've started running the numbers on a post-retirement budget and have come to pretty much the same conclusion.
We consume a lot (embarrassing actually)- but it's a relatively small percentage of the pie compared to things that are going to go down or be eliminated soon like taxes, higher education costs, mortgage, savings, costs of many vehicles, trips for four people versus two etc.

It's looking like we will be able to consume a lot more in retirement than we do now on a lot less income. If we eliminate the money pit house with something more efficient and less costly to maintain we should be in great shape. Of course we are going to use a post-retirement budget versus a percentage of work income but the authors point is a good one. These "guides" that insist you need some big percentage of pre-retirement income are probably wrong for Boglehead type households that aren't living hand to mouth, saving little, doing little to fund higher ed, carrying debt that won't be extinguished by retirement. That crowd is going to need a big income stream or else take a huge lifestyle hit in retirement. Or declare bankruptcy which is increasingly common for retirees just a few years in. Several people at work are dealing with this for their parents.
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Re: 35% is the new 70%

Postby Ged » Thu Jul 25, 2013 9:59 am

Why not drop the idea that one can calculate require post-retirement income as a percentage of pre-retirement income altogether? There are too many individual variations to make this accurate enough to be useful. Instead encourage people to do an expense based calculation.
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Re: 35% is the new 70%

Postby midareff » Thu Jul 25, 2013 9:59 am

The 800 pound gorilla in the room, and not to be forgotten is the steadily rising cost of comprehensive medical coverage. A bit over $1K a month for me and wifey and certainly not expected to go down. Having said that ... I targeted a retired income = to my full working income (or more) and since I am no longer saving some 30% of that income it is like having a huge raise in available spending $$. More time = more recreational expenses, more travel, more toys.... sorry, gotta go, seeing Red 2 at the theater in a little bit.
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Re: 35% is the new 70%

Postby HomerJ » Thu Jul 25, 2013 10:21 am

dickenjb wrote:
matonplayer wrote:Your percentage of income is irrelevant. What matters is your percentage of spending.


Bingo. I have said for years 70% of preretirement income is rubbish. What you need is 100% of postretirement spending. And that varies so much from person to person as to make % of preretirement income rules of thumb total rubbish.


Yep. Expenses matter... not pre-retirement income...

As I've said before.. Taxes and mortgage and savings eat up a huge part of ones income. Take those away in retirement, and you need a lot less.

$100k family
-$6k payroll taxes
-$18k mortgage
-$12k savings

= $64k paying for everything else.

So after those 3 big expenses go away, you need $64k to live the exact same lifestyle as before. Throw in Social Security which will probably pay $2k a month for someone making $100k, and you really only need to generate $44k from your investments to live the exact same lifestyle as you did when you were making $100k a year.

And that doesn't even count kids. Once they are gone, expenses go down even further.
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Re: 35% is the new 70%

Postby k66 » Thu Jul 25, 2013 10:23 am

I think the graph is more misleading than it is incorrect. For example, it provides the various expenditures as percentages not absolute dollars. We see the 30 y.o. spending ~50% on regular consumption but the 40 y.o. is down to ~30% wherein it remains stable until retirement. This is more a reflection of the 30 y.o's increasing salary, not decreasing consumption. Presenting the data this way makes it very hard to interpret. There is also the fact that it presumably covers a very large range of family situations and incomes.

It is strange though that younger ages have no "child" costs or that "higher taxes" are so large (for the poster who enquired, I believe "higher taxes" is intended to be the additional taxes that one pays while earning higher income as opposed to the presumed lower taxes on a smaller retirement income); thus it becomes a cost today that can be eliminated tomorrow.
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Re: 35% is the new 70%

Postby IlliniDave » Thu Jul 25, 2013 10:45 am

wjo wrote:Sounds like an article designed to give hope to those who haven't saved enough.

If 35% of pre-retirement gross is a floor for spending, then that may be correct. But 35% as an amount that is what people aspire to sounds wrong. It may reflect the reality that people who are working and finish paying the mortgage and getting the kids through school start saving a tremendous amount late and life and only have enough to retire on 35%. But those facts sure don't sound aspirational.


Not necessarily. I'm saving to replace 20% of my present income (at a 3% withdrawal rate while planning to actually use only half that much). There is a small amount of outside fixed income in the picture as well, and between the two I'll be able to maintain a higher standard of living (as measured by things I can spend money on above my needs) than I am while working/accumulating. The aspirational tradeoff relative to shooting for the traditional 80%? Retire 15 years sooner than I initially planned. My target is 2.5X my "floor" and I've determined the 15 years is worth more to me than the additional multiples of spending money above my needs.

I'm quite content with a "modest" lifestyle. It's not for everyone, but for those who aren't "aspirational" and somewhat frugal by nature it can dramatically change the retirement math, especially those fortunate enough to to achieve high income relative to median during their working years. For many people working into their mid-sixties or longer to replace the lion's share of pre-retirement income is optional.

That said, proliferating a "35%-rule" as a new standard is not a good idea because it won't be appropriate for everyone. Better to just encourage individuals to use a higher percent while their young and unsure of the future then point out that in later mid life they need to revisit the issue armed with a couple decades of understanding of themselves and their situation.
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Re: 35% is the new 70%

Postby ruralavalon » Thu Jul 25, 2013 11:21 am

matonplayer wrote:Your percentage of income is irrelevant. What matters is your percentage of spending.


Absolutley, its spending on daily living, not annual income, that counts for estimating post-retirement spending.

Think about it. From your income deduct:
1. what you contribute to 401k, IRAs etc;
2. mortgage payments if you own; and
3. college expenses if you have children.
Those are huge expenses paid from income, which should disappear by retirement time.

I was self- employed, so had to pay a total of 15% of income in self-employment tax and medicare tax. Now I don't pay into SS, I draw out.

Medicare even with Part B and Part D premiums, a supplemental policy, and the deductibles and co-pays, medical care now costs in total about 25% of the cost of the the health care coverage we had before.

Then there are smaller expenses related to working which also disappear or shrink on retirement (in my case: parking fees downtown; extra auto expense for commute; professional dues and memberships; required continuing education costs; suits to look professional, etc.). Those add up to a consideable amount.

We spend far less now, with no reduced standard of livng and greatly increase travel, than when I was working.
Last edited by ruralavalon on Thu Jul 25, 2013 12:29 pm, edited 1 time in total.
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Re: 35% is the new 70%

Postby awval999 » Thu Jul 25, 2013 11:29 am

Annual Gross Pay
$108,000.00

Federal Withholding
$16,108.75

Social Security
$6,696.00

Medicare
$1,566.00

Ohio
$3,448.67

City Tax
$2,160.00

401k
$17,280.00

Net Pay
$60,740.58

- $14,400 yearly student loans (these damn well will be paid off by retirement)
- $15,300 rent (assume will have a paid off house by retirement)
- $5,500 ROTH IRA/year
---------------
$25,540 in yearly spending = 24%.

With all those expenses, I still manage to pay utilities, eat out, go to Europe, buy an engagement ring, have a 4 year Honda Civic car loan, have a cash savings, road trip, kayak, and on and on and on. I even forgot to deduct $100/month pretax for my health insurance. But it wouldn't change the calculation that much.

Running through these numbers at age 28 sure makes it seem pretty easy. Heck, social security (*knock on wood) may even be enough to get me half the way there. I really don't think retirement is that hard. Maybe it's my young naiveity.
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Re: 35% is the new 70%

Postby ruralavalon » Thu Jul 25, 2013 11:42 am

madbrain wrote:This is one strange chart.

I see a few oddities.


Not as odd as one might think.

Do people really save nothing at all for retirement at age 40 ? If you start having children when you are in your 20's, your 40's is when expenses may peak for college etc. Also if you own a home, and took a 30 year mortgage, you are barely statrted on paying off that loan. And even if you took a 15 year mortgage you are still payng. So for many people, there is not much left to put into a retirement account.

And even so, its not that "people really save nothing at all ", its that many people can save only a little.


Why do child costs continue all the way until 65 ? This is a serious question as someone without kids. Don't the kids ever become self sufficient ? I suppose this may account for the different parenting ages. But it's sure strange that nobody seems to have any child costs before 35. Yes: some children (not ours) are back home after college. So some don't become self-sufficient on schedule. So the chart shows some child expense extending out for some households, even though for the median( typical) household those expenses will have have stopped.

If you have a child at age 40 (the last of our 4 was born when we were 40), then child care costs including college do extend into your 60's. If your first child is born in your early 20's then 35 is when major expenses, like raising a teenager and then college, can really start to hit.

And its not that "nobody" has any childcare expenses before 35, its that on average fewer do.


I don't have any idea where they account for medical expenses.

For the rest, the chart can only represent averages (a mean, not a median) for each category of spending and age cohort. So yes: some people don't pay off the home mortgage by retirement; and some people at any given age spend more than their income.. Outlier households pull the average (mean) up and thats why some expenses are shown on the chart to continue, even though for the median (typical) household they probably have come to a halt by 65.

EDITS for typos and spelling
Last edited by ruralavalon on Thu Jul 25, 2013 12:22 pm, edited 8 times in total.
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Re: 35% is the new 70%

Postby LFKB » Thu Jul 25, 2013 12:02 pm

If that red "retirement savings" bar was flipped with the higher percentages in the early years a lot more people would be able to spend 70%
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Re: 35% is the new 70%

Postby Investing is boring » Thu Jul 25, 2013 12:09 pm

Sans rent, our spending is ~$5k per month all in. Add maybe $1k for property tax (which would remain after our home is bought and paid off), thats $6k per month or $72k per year. Combined my wife and I make $300k - $400k per year. So using the $300k, our expenses are 24% of gross income.

Currently we go on a couple vacations per year. Eat out several times per week. And generally don't deprive ourselves. In retirement we would cook more, as both of us love it we are just too busy most of the time. We would move to a lower cost of living area. So lets say that $72k drops to $65k. Multiply by the perpetual sustainable withdrawl rate of 2.5%, I would need roughly $2.6m in todays dollars. This method of estimation is lower then the $3.2m-$3.6m I am shooting for from other methods of estimation.

I dont like this method for establishing a "target" - as I think its dangerous to aspire to be mediocre. It makes people who aren't saving enough feel better about themselves. Much like our refusal to allow kids to lose at tee-ball, we seem to want those same rules for the real world. Too bad for many that the real world doens't work that way. At least I know who will be serving me my monthly Big Mac when i retire at 50...
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Re: 35% is the new 70%

Postby MoonOrb » Thu Jul 25, 2013 1:28 pm

I always thought of the "% of pre-retirement income" rule of thumb as something that the investment industry was really happy to hear constantly repeated, since it put the spotlight on "you need to have more invested" rather than "you need to control your expenses."

Having more invested is important, but as a starting point in trying to assess the income needed in retirement, beginning with expenses is the only thing that makes sense. The % of pre-retirement income turns this process on its head.
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Re: 35% is the new 70%

Postby serbeer » Thu Jul 25, 2013 1:37 pm

Hm, looking at the diagram I am wondering why there is sharp jump in Child costs at age 40, which appears to correspond to year 6 of having children (assuming being born at 35, unless kids are estimated to cost next to nothing at before that). The jump eats up all of the retirement savings that year and almost all the next several years.
Since it is clearly not college time yet, what is it? Private school? Braces?
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Re: 35% is the new 70%

Postby Gnirk » Thu Jul 25, 2013 1:58 pm

We actually spend more in retirement than when we were working. But we planned for it. We lived well below our means during our working years. While we no longer have commute costs to-from work (40 miles each way), or need to spend money on professional attire, we now have the costs of supporting our snowbird home, in addition to our main home. We eat dinner out more often, our health insurance costs are higher (medicare B cost plus medicare advantage plan), and we go on a nice trip once every few years.
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Re: 35% is the new 70%

Postby ruralavalon » Thu Jul 25, 2013 2:23 pm

serbeer wrote:Hm, looking at the diagram I am wondering why there is sharp jump in Child costs at age 40, which appears to correspond to year 6 of having children (assuming being born at 35, unless kids are estimated to cost next to nothing at before that). The jump eats up all of the retirement savings that year and almost all the next several years.
Since it is clearly not college time yet, what is it? Private school? Braces?

If you have children in your 20's and early 30's as is fairly typical (table 79 is hard to read, looks like about 75% of total births for the last year reported) census data, then your 40's is when they hit college and cost really big bucks.
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Re: 35% is the new 70%

Postby Clearly_Irrational » Thu Jul 25, 2013 2:56 pm

awval999 wrote:Annual Gross Pay $108,000.00

Running through these numbers at age 28 sure makes it seem pretty easy. Heck, social security (*knock on wood) may even be enough to get me half the way there. I really don't think retirement is that hard. Maybe it's my young naiveity.


Or maybe it's the fact that you make double the median household income? The median income for one adult is even worse at only about 30k.
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Re: 35% is the new 70%

Postby statguy » Thu Jul 25, 2013 8:18 pm

serbeer wrote:Hm, looking at the diagram I am wondering why there is sharp jump in Child costs at age 40, which appears to correspond to year 6 of having children (assuming being born at 35, unless kids are estimated to cost next to nothing at before that). The jump eats up all of the retirement savings that year and almost all the next several years.
Since it is clearly not college time yet, what is it? Private school? Braces?


I think it probably means that a second child is born 6 years after the first child, hence the doubling of the cost.
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Re: 35% is the new 70%

Postby Grt2bOutdoors » Thu Jul 25, 2013 9:43 pm

ruralavalon wrote:
serbeer wrote:Hm, looking at the diagram I am wondering why there is sharp jump in Child costs at age 40, which appears to correspond to year 6 of having children (assuming being born at 35, unless kids are estimated to cost next to nothing at before that). The jump eats up all of the retirement savings that year and almost all the next several years.
Since it is clearly not college time yet, what is it? Private school? Braces?

If you have children in your 20's and early 30's as is fairly typical (table 79 is hard to read, looks like about 75% of total births for the last year reported) census data, then your 40's is when they hit college and cost really big bucks.


Yes, but if you are able to assign some portion of savings for future college expenses early on, the expenses could be somewhat manageable.
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Re: 35% is the new 70%

Postby EmergDoc » Thu Jul 25, 2013 11:21 pm

This doesn't surprise me a bit. I posted a similar figure almost two years ago:

http://whitecoatinvestor.com/percentage ... etirement/

I figured I needed around 30% of my income to retire. The number is probably higher for those with less income, but SS does make up a higher percentage for those folks.
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Re: 35% is the new 70%

Postby madbrain » Thu Jul 25, 2013 11:55 pm

EmergDoc wrote:This doesn't surprise me a bit. I posted a similar figure almost two years ago:

http://whitecoatinvestor.com/percentage ... etirement/

I figured I needed around 30% of my income to retire. The number is probably higher for those with less income, but SS does make up a higher percentage for those folks.


Social security is not mentioned in the article reference by the OP.

Actually, this is a Canadian publication, which explains a lot, notably about healthcare expenses being nowhere to be found. They are covered by taxes.
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Re: 35% is the new 70%

Postby Kalo » Fri Jul 26, 2013 12:14 am

Personally I kind of view it as what's necessary and I can live on, and then what would be really nice to have. The 35% is probably close to what I could get by on. But I'm still going to save as much as I comfortably can, and hopefully I'll never find out what it is like to have to live on the 35%.

Benchmarks are fine and help people plan or at least get comfortable, I'm sure. But I think not knowing exactly can also provide an incentive to stay at it and make those contributions (and forego most of the toys until later).

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Re: 35% is the new 70%

Postby k66 » Fri Jul 26, 2013 9:55 am

madbrain wrote:
EmergDoc wrote:This doesn't surprise me a bit. I posted a similar figure almost two years ago:

http://whitecoatinvestor.com/percentage ... etirement/

I figured I needed around 30% of my income to retire. The number is probably higher for those with less income, but SS does make up a higher percentage for those folks.


Social security is not mentioned in the article reference by the OP.

Actually, this is a Canadian publication, which explains a lot, notably about healthcare expenses being nowhere to be found. They are covered by taxes.


Yes, basic health care is extended to every Canadian regardless of age. There are many costs not covered though. Among them Long Term Care, extended health insurance, dental, etc. And social benefits are not shown in the graph (Canadians can expect to receive up to three payments in their retirement years: CPP/QPP Pension, Old Age Security, and the Guaranteed Income Supplement) as they would only normally be received by retirees. CPP is an earned benefit derived from a lifetime of working earnings, OAS is extended to seniors of modest income (i.e. it is clawed back at higher incomes), and GIS is only available to those of lower income thresholds.

The graph provided is odd in another respect too in that it is based on Gross Income, but there is no item for Income Tax (only the Higher Income Tax, which I take to be the tax premium paid by higher income working individuals versus lower income retirees), or CPP and EI payments. Lumped together, these three could easily be expected to be >20% of one's gross paycheque.
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Re: 35% is the new 70%

Postby ruralavalon » Fri Jul 26, 2013 10:14 am

Grt2bOutdoors wrote:
ruralavalon wrote:
serbeer wrote:Hm, looking at the diagram I am wondering why there is sharp jump in Child costs at age 40, which appears to correspond to year 6 of having children (assuming being born at 35, unless kids are estimated to cost next to nothing at before that). The jump eats up all of the retirement savings that year and almost all the next several years.
Since it is clearly not college time yet, what is it? Private school? Braces?

If you have children in your 20's and early 30's as is fairly typical (table 79 is hard to read, looks like about 75% of total births for the last year reported) census data, then your 40's is when they hit college and cost really big bucks.


Yes, but if you are able to assign some portion of savings for future college expenses early on, the expenses could be somewhat manageable.

529 plans weren't even invented until 1996 (just 17 years ago), so the mechanisms for advance planning for your childrens' college expenses were limited for anyone with children now just entering or now in college.

Our children finished long ago, thank goodness, and we were able to pay for it without burying them under student loans. I do feel bad for any parent or student now confronting this problem, there is no good solution.

In my opinion the current level of expenses, concentrated in a four year period per child, are never likely to be very readily manageable except for households with very high incomes.

When our last child graduated, it felt like a very large pay raise at our house.
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Re: 35% is the new 70%

Postby Easy Rhino » Fri Jul 26, 2013 6:53 pm

ofcmetz wrote:People apparently don't have kids until age 35, or save for retirement at age 40, or cut the kids off financially ever. :D


Maybe not cutting them off ever was compensation for also apparantly not helping pay for college.

Since the graph is apparently for one couple,I think the closer you look at it, the more we'll go crazy.
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Re: 35% is the new 70%

Postby joe8d » Fri Jul 26, 2013 10:21 pm

twacapt wrote:Not true. I have been retired for 10 years and my wife and I spend 80 - 90% of pre retirement income. If you want to enjoy retirement, you will want to travel, enjoy some hobbies and do some things you never had time for before....new golf clubs, fishing boat, learning to fly a light airplane.....perhaps snowbird in Florida for a couple months, etc. These additional expenditures will more than make up for the money you save in not commuting, buying suits or other clothes, plus other expenditures associated with work.


Good for you.Many of us over 70 Retirees have trouble putting our pants on,so things like white water rafting and sky diving are out the question :happy
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