Replace less than 80% of income in retirement?
Replace less than 80% of income in retirement?
Hello,
I'm 31 years old, married, no kids. My wife and I make about 95k per year as of now. I work for a major bank, and my wife works for the state. I automatically contribute 7% of my gross earnings to my 401k, and the bank matches it dollar for dollar up to 6%, and then gives an additional 2% for annual profit sharing. For my wife, they automatically take 6% of her gross income and sets it aside in a retirement/pension account. My employer matches 6%, and then gives 2% annually to profit sharing on top of that. I have a rather aggressive asset allocation right now, with 90% being in equities/index funds, and 10% in bonds. I'm pretty pleased with my returns as of right now.
I've thought about increasing my savings to my 401k, or opening a Roth IRA. However lately I've been asking myself is such really necessary, and if I wouldn't be better off just using the extra income I have to more short-term savings/spending goals with 5-10-15 year horizons. We don't have any kids right now, but plan on having some in about 2 years. I know most financial advisors suggest you should save so as to to live off 80% of your gross income in retirement. However, I must ask, isn't replacing 80% of your current gross income a bit excessive?
Right now my wife and I are living off about 51% of our gross annual income, and that includes a mortgage, 2 car payments, food, utilities, "fun money", savings, and paying off some minor credit card debt. If we are living off 51% of our gross annual income presently, and doing so comfortably, during retirement why would we need to replace 80% of our gross income, when we would expect to not have a mortgage, car payment, or credit card debt by then? Indeed, if all we had were general food, medical insurance, utility bill payments, and some "fun money" expenses... it seems like we could comfortably live off 40-50% of our current income levels in retirement as our regular expenses would be dramatically less?
So, might increasing our contribution amounts to retirement to the recommended 10-15% levels be a bit excessive? Currently my employer retirement calculator says I can expect to replace about 75% of my income in retirement with the contribution amounts I'm at now. Such would seem to be in excess of what I'm living at now. Why push a bigger nest egg?
Thanks,
Jimmy
I'm 31 years old, married, no kids. My wife and I make about 95k per year as of now. I work for a major bank, and my wife works for the state. I automatically contribute 7% of my gross earnings to my 401k, and the bank matches it dollar for dollar up to 6%, and then gives an additional 2% for annual profit sharing. For my wife, they automatically take 6% of her gross income and sets it aside in a retirement/pension account. My employer matches 6%, and then gives 2% annually to profit sharing on top of that. I have a rather aggressive asset allocation right now, with 90% being in equities/index funds, and 10% in bonds. I'm pretty pleased with my returns as of right now.
I've thought about increasing my savings to my 401k, or opening a Roth IRA. However lately I've been asking myself is such really necessary, and if I wouldn't be better off just using the extra income I have to more short-term savings/spending goals with 5-10-15 year horizons. We don't have any kids right now, but plan on having some in about 2 years. I know most financial advisors suggest you should save so as to to live off 80% of your gross income in retirement. However, I must ask, isn't replacing 80% of your current gross income a bit excessive?
Right now my wife and I are living off about 51% of our gross annual income, and that includes a mortgage, 2 car payments, food, utilities, "fun money", savings, and paying off some minor credit card debt. If we are living off 51% of our gross annual income presently, and doing so comfortably, during retirement why would we need to replace 80% of our gross income, when we would expect to not have a mortgage, car payment, or credit card debt by then? Indeed, if all we had were general food, medical insurance, utility bill payments, and some "fun money" expenses... it seems like we could comfortably live off 40-50% of our current income levels in retirement as our regular expenses would be dramatically less?
So, might increasing our contribution amounts to retirement to the recommended 10-15% levels be a bit excessive? Currently my employer retirement calculator says I can expect to replace about 75% of my income in retirement with the contribution amounts I'm at now. Such would seem to be in excess of what I'm living at now. Why push a bigger nest egg?
Thanks,
Jimmy
Re: Replace less than 80% of income in retirement?
Jimmy,kingjimmy wrote:I know most financial advisors suggest you should save so as to to live off 80% of your gross income in retirement. However, I must ask, isn't replacing 80% of your current gross income a bit excessive?
Each individual is different and I strongly dislike these generalized guidelines. For instance, If you save near (or over) 20% of salary/income, pay taxes (like SS tax, Medicare tax), pay a mortgage, have work-related expenses that are otherwise unnecessary, etc. etc., sure you don't need to replace 80%. That said, some other expenses may increase in retirement.
Last edited by YDNAL on Thu Mar 06, 2014 7:54 am, edited 1 time in total.
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Re: Replace less than 80% of income in retirement?
If you've been reading the forum for a while, you know we tend to focus on EXPENSES just before retirement rather than income.
That being said, I was saving a bit over 30% of gross income for retirement my last few years of employment. And now my retirement income is around 70% of my previous employment income, meaning it's about the SAME as my previous net income.
And my retirement income exceeds my expenses by a comfortable amount which is a good way to have it...
That being said, I was saving a bit over 30% of gross income for retirement my last few years of employment. And now my retirement income is around 70% of my previous employment income, meaning it's about the SAME as my previous net income.
And my retirement income exceeds my expenses by a comfortable amount which is a good way to have it...
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Re: Replace less than 80% of income in retirement?
You make do. There are tens of millions of folks living on social security alone with incomes less than $20,000 a year. So, yeah you'll probably be fine replacing 50-60% of your income. You'll have to just adjust your spending and probably not be taking exotic trips all over the world each year.
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Re: Replace less than 80% of income in retirement?
At the OP's age of 31, it's way too early to focus on end-game expenses and income.
The focus for the next few decades needs to be on maintaining and increasing your savings rate, though with child-rearing expenses, it may not be easy.
A higher savings rate gives you more options when you're in your 50's and that's good to have...
The focus for the next few decades needs to be on maintaining and increasing your savings rate, though with child-rearing expenses, it may not be easy.
A higher savings rate gives you more options when you're in your 50's and that's good to have...
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Re: Replace less than 80% of income in retirement?
There is no way to calculate a magic number necessary for retirement at your age because its impossible to determine what your costs will be in retirement or where your retirement income will come from. No one knows what SS benefits be in 30 years.
My own estimate is that you should save at minimum of 15% of your income for retirement or 25% minus any employer contributions to a retirement plan. The division between pre and after tax depends on how much can be contributed to a 401k plan and the amount of tax efficiency you need.
My own estimate is that you should save at minimum of 15% of your income for retirement or 25% minus any employer contributions to a retirement plan. The division between pre and after tax depends on how much can be contributed to a 401k plan and the amount of tax efficiency you need.
Re: Replace less than 80% of income in retirement?
Jimmy - Many people get by on less than 80% and for the reasons you explained, some of the expenses you have today will go away in retirement. But, retirement can also bring unexpected medical expenses and medical costs are likely to be a larger part of your budget in retirement than they are today. Also, I would much rather go into retirement with a cushion against inflation and unexpected costs than relying on a hope and a prayer that everything goes right.
I'm about 10 years older than you and if I could go back and advise my 31 year old self, the advice I would have given myself is to pay down debt and maximize retirement while I'm in a position to do so financially. It's to your advantage to put away money now while you have it for 2 reasons - one, the more time you give your money to work for you, the more you'll have in retirement - two, you may find once you have kids that you won't have the flexibility to put away as much as you can today with competing demands for that money. Give yourself the flexibility and freedom by making that commitment today to pay down debt and max out your retirement so in a few years, if you find the need to scale those back, you can do so without the worry that you're putting yourself behind for retirement. It may require a little bit of sacrifice but I can tell you that nothing feels better than knowing that you have that money waiting for you when you retire versus hitting your 40s and 50s and finding that you're behind where you should be saving for retirement.
I'm about 10 years older than you and if I could go back and advise my 31 year old self, the advice I would have given myself is to pay down debt and maximize retirement while I'm in a position to do so financially. It's to your advantage to put away money now while you have it for 2 reasons - one, the more time you give your money to work for you, the more you'll have in retirement - two, you may find once you have kids that you won't have the flexibility to put away as much as you can today with competing demands for that money. Give yourself the flexibility and freedom by making that commitment today to pay down debt and max out your retirement so in a few years, if you find the need to scale those back, you can do so without the worry that you're putting yourself behind for retirement. It may require a little bit of sacrifice but I can tell you that nothing feels better than knowing that you have that money waiting for you when you retire versus hitting your 40s and 50s and finding that you're behind where you should be saving for retirement.
Re: Replace less than 80% of income in retirement?
OP is planning the savings rate (short, mid, long) and needs to estimate [roughly] what income should be replaced in retirement to establish a goal and develop a plan. Isn't that what this thread is all about?The Wizard wrote:At the OP's age of 31, it's way too early to focus on end-game expenses and income.
kingjimmy [OP]» Thu Mar 06, 2014 10:36 am wrote:Replace less than 80% of income in retirement?
Agree, with a small caveat.The focus Importance for the next few decades needs to be on maintaining and increasing your savings rate,....
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Re: Replace less than 80% of income in retirement?
As someone in a very similar position at age 31 (now husband and I are 39), perhaps I can provide some insight.
You want to save as much as you can now so that you have the flexibility to take off a few years once you have a child (I was home for three years), You may want to have a stay at home parent, go part-time, or have a more flexible job so you can do school drop off and pick up and after school activities. I have one daughter (age 8) and my husband has job that allows me to work in the corporate IT world while he does most of the after-school duties like driving, piano practice, playdates, etc.
I used to have piles of money in my checking account, now every single cent is accounted for. We are on track for early retirement, but only because we aggressively saved while young. My advice is save now and after you get through the haze of young children, reevaluate your needs. We could probably cut back our savings rate now since we decided one child was the right number for our family, but between college savings, piano and ballet lessons, Montessori school, and our home, we burn up a lot more money than we used to.
You want to save as much as you can now so that you have the flexibility to take off a few years once you have a child (I was home for three years), You may want to have a stay at home parent, go part-time, or have a more flexible job so you can do school drop off and pick up and after school activities. I have one daughter (age 8) and my husband has job that allows me to work in the corporate IT world while he does most of the after-school duties like driving, piano practice, playdates, etc.
I used to have piles of money in my checking account, now every single cent is accounted for. We are on track for early retirement, but only because we aggressively saved while young. My advice is save now and after you get through the haze of young children, reevaluate your needs. We could probably cut back our savings rate now since we decided one child was the right number for our family, but between college savings, piano and ballet lessons, Montessori school, and our home, we burn up a lot more money than we used to.
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Re: Replace less than 80% of income in retirement?
Save early, save often. Make hay while the sun shines. The more you save today, the less you need to save tomorrow - you let compounding do the heavy lifting for you. BTW, my calculator says I'm on track to earn more in retirement than I do today - I don't buy it, not for a second. Those calculators are basing those ending numbers on the ability for you to retain employment through age 65 or 67, returns of X% and continual and increasing contributions over time. If you want to play defensively and mitigate risk, you save as much as you can while you can. No one is promised anything - there are no guarantees, and even guarantees can be broken or modified.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Replace less than 80% of income in retirement?
It IS expense replacement which needs to be focused on in retirement planning, not income replacement, as has already been mentioned.
I retired in 1998. My last full year of employment, 1997, my income totaled $108,513. My expenses that year totaled approximately $78,000, including everything, including income taxes, but not new savings. Without federal income taxes ($20,764) and savings that year, my expenses totaled $57,831.
Our actual in-retirement expense history shown here include everything. (Income tax was not significant after 2001.)
Five year average expenses during retirement including, taxes, donations, new automobile purchases, vacations...everything
l998-2002 $57,898
2003-2007 57,825
2008-2012 65,981
By itself, our 2013 expenses totaled $71,298, but that had higher vacation expenses than normal ($15,282).
So, I didn't have to keep up with pre-retirement income, but pre-retirement spending. Investing performance during retirement more than took care of that.
I retired in 1998. My last full year of employment, 1997, my income totaled $108,513. My expenses that year totaled approximately $78,000, including everything, including income taxes, but not new savings. Without federal income taxes ($20,764) and savings that year, my expenses totaled $57,831.
Our actual in-retirement expense history shown here include everything. (Income tax was not significant after 2001.)
Five year average expenses during retirement including, taxes, donations, new automobile purchases, vacations...everything
l998-2002 $57,898
2003-2007 57,825
2008-2012 65,981
By itself, our 2013 expenses totaled $71,298, but that had higher vacation expenses than normal ($15,282).
So, I didn't have to keep up with pre-retirement income, but pre-retirement spending. Investing performance during retirement more than took care of that.
Last edited by Sheepdog on Thu Mar 06, 2014 9:06 am, edited 1 time in total.
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Re: Replace less than 80% of income in retirement?
You ask two rather different questions
As noted by others, you should set a target of income to meet the desired set of expenses. But I don't see how you do that at age 31.
FWIW: I'm a few years out from retirement, and it looks like once kids are finished with college, house paid for, no more retirement savings and no more social security deductions, etc., plus some additional travel, etc. we'll need a replacement rate of about 60% in per-retirement gross income.
No way to know. You are talking about 30-60 years or so into the future. It seems you are putting 15% of your salary and 6% of your wife's salary towards retirement. I don't know what that averages, but something less than 15%. Historically 15% has been a pretty good number, though 20% is sometimes a better number. Given things like employer forced early retirement, health problems cropping up in late middle age (leading to forced early retirement), job burn out out and desire for early semi-retirement/downshifting, I would suggest there are good reasons to work up to at least a total rate of 15% and better a 20% rate to add a margin of safety.I've been asking myself is such really necessary
Given you have no idea what your final income will be in 30 or so years, I don't know how one even targets an 80% figure at age 31. Also, given you have no real idea how the markets will perform over the next 30 years, even if you did know what income you want to target it is difficult at best to know how much to save each year to hit that income on a fixed date.I know most financial advisors suggest you should save so as to to live off 80% of your gross income in retirement. However, I must ask, isn't replacing 80% of your current gross income a bit excessive?
As noted by others, you should set a target of income to meet the desired set of expenses. But I don't see how you do that at age 31.
FWIW: I'm a few years out from retirement, and it looks like once kids are finished with college, house paid for, no more retirement savings and no more social security deductions, etc., plus some additional travel, etc. we'll need a replacement rate of about 60% in per-retirement gross income.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Replace less than 80% of income in retirement?
To the OP. I'm just chiming in to reinforce the point that saving now is a lot more important than saving later, because of the magic of compound growth. If you can sustain 15-20% saving rate, as your salaries grow, your retirement "need" (80%, 70%) will simply take care of itself, if you've been prudent in how you invest that money.
You may well shift the focus of your saving once kids arrive on board. Not only, as a previous poster noted, might that affect your work level (including a possible timeout), and your immediate expense level (school, etc.) but you will begin to think about targeted saving/investing for the kids' college education. For us, the college costs for two kids well exceeded the cost of our house. And what do we have to show for it??? Well, frankly, a lot. But you can't sell your highly educated kids for a profit -- unlike your house.
In short, save more now while you can. And keep it up.
You may well shift the focus of your saving once kids arrive on board. Not only, as a previous poster noted, might that affect your work level (including a possible timeout), and your immediate expense level (school, etc.) but you will begin to think about targeted saving/investing for the kids' college education. For us, the college costs for two kids well exceeded the cost of our house. And what do we have to show for it??? Well, frankly, a lot. But you can't sell your highly educated kids for a profit -- unlike your house.
In short, save more now while you can. And keep it up.
Re: Replace less than 80% of income in retirement?
+1. +2, ++++Garco wrote:To the OP. I'm just chiming in to reinforce the point that saving now is a lot more important than saving later, because of the magic of compound growth. If you can sustain 15-20% saving rate, as your salaries grow, your retirement "need" (80%, 70%) will simply take care of itself, if you've been prudent in how you invest that money.
You may well shift the focus of your saving once kids arrive on board. Not only, as a previous poster noted, might that affect your work level (including a possible timeout), and your immediate expense level (school, etc.) but you will begin to think about targeted saving/investing for the kids' college education. For us, the college costs for two kids well exceeded the cost of our house. And what do we have to show for it??? Well, frankly, a lot. But you can't sell your highly educated kids for a profit -- unlike your house.
In short, save more now while you can. And keep it up.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
Re: Replace less than 80% of income in retirement?
Why not open a Roth IRA? You won't pay anything on increases if you wait until retirement (fantastic deal!) and the amount you put in is accessible without cost should you really need it. It can be a back-up emergency fund. (You should have several months of emergency money.)
Also, save some money, or pay back some of your loans, so you don't have to borrow to buy cars, etc. Get out of debt, except for mortgage, asap.
Also, save some money, or pay back some of your loans, so you don't have to borrow to buy cars, etc. Get out of debt, except for mortgage, asap.
Re: Replace less than 80% of income in retirement?
Yes, it's not about income, it's about expenses... That 80% rule is hogwash.kingjimmy wrote:I know most financial advisors suggest you should save so as to to live off 80% of your gross income in retirement. However, I must ask, isn't replacing 80% of your current gross income a bit excessive?
But you may be too young to get a good idea of what your expenses will be in retirement... Save what you can now. Increase your savings with each raise. If you get a $3000 raise, increase your savings by $1500, and increase your lifestyle by $1500...
If you follow this, you won't feel you are depriving yourself, and your savings rate will be quite high by your mid 40s.
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Re: Replace less than 80% of income in retirement?
These last few years while you are dual-income-no-kids and the stock market has been booming shouldn't be your expenses and savings guide for the future. The stock market may come to it's senses. Kids cost money, kids in college cost lots of it, sometimes kids done with college still cost money for way longer than you plan. Best to err on the high side and save a lot now while you can. Right now you are not even saving 10%.kingjimmy wrote: I've thought about increasing my savings to my 401k, or opening a Roth IRA. However lately I've been asking myself is such really necessary, and if I wouldn't be better off just using the extra income I have to more short-term savings/spending goals with 5-10-15 year horizons. We don't have any kids right now, but plan on having some in about 2 years. I know most financial advisors suggest you should save so as to to live off 80% of your gross income in retirement. However, I must ask, isn't replacing 80% of your current gross income a bit excessive?
Right now my wife and I are living off about 51% of our gross annual income, and that includes a mortgage, 2 car payments, food, utilities, "fun money", savings, and paying off some minor credit card debt. If we are living off 51% of our gross annual income presently, and doing so comfortably, during retirement why would we need to replace 80% of our gross income, when we would expect to not have a mortgage, car payment, or credit card debt by then? Indeed, if all we had were general food, medical insurance, utility bill payments, and some "fun money" expenses... it seems like we could comfortably live off 40-50% of our current income levels in retirement as our regular expenses would be dramatically less?
So, might increasing our contribution amounts to retirement to the recommended 10-15% levels be a bit excessive? Currently my employer retirement calculator says I can expect to replace about 75% of my income in retirement with the contribution amounts I'm at now. Such would seem to be in excess of what I'm living at now. Why push a bigger nest egg?
Secondly, I'm thinking perhaps you or the employer retirement calculator are making some rosy assumptions about future investment returns?
JW
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Re: Replace less than 80% of income in retirement?
Ostensibly, yes, but I'm saying it's not quite the right question to be asking.YDNAL wrote:OP is planning the savings rate (short, mid, long) and needs to estimate [roughly] what income should be replaced in retirement to establish a goal and develop a plan. Isn't that what this thread is all about?The Wizard wrote:At the OP's age of 31, it's way too early to focus on end-game expenses and income.
Even if we knew with certainty that his retirement date would be May 31st, 204X, there's no way we can say with any confidence that a 17%, 21% or 25% savings rate would accumulate Just The Right Size nest egg to provide just the right amount of retirement income.
So instead, focus on achieving an above average savings rate and then MONITOR both your expenses and your accumulation as the decades go on. Eventually, you'll have more than 25 times your annual expenses put away, and if that happens years before you plan to retire, well...GOOD...
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Re: Replace less than 80% of income in retirement?
I think it's great that you can survive on half your gross income. But your alternative of "short-term savings/spending goals" sounds a lot like what many Americans do in their prime earning years - spend money on new cars, home projects, vacations, etc. while shortchanging retirement.
I'm a few years ahead of you, and I can say the earlier you start maximizing retirement savings, the better. Your 40-year-old self will wish you'd saved more, and your 50-year-old self will really wish you'd saved more. Don't be the guy at 55 who looks at his account and complains about the fact that he has to work until 70 despite wanting to retire early. I don't know many people who say, "I wish I'd saved less for retirement."
It's hard to predict inflation, your employment future, your health and costs associated with raising children. The more you save now, the more you benefit from compounding and the greater your ability to tolerate risks in your portfolio. The bigger your nest egg now, the earlier you will have the freedom to choose whether to work or not. You may think you want to work until 65, but you might feel differently in 20 years.
I'm a few years ahead of you, and I can say the earlier you start maximizing retirement savings, the better. Your 40-year-old self will wish you'd saved more, and your 50-year-old self will really wish you'd saved more. Don't be the guy at 55 who looks at his account and complains about the fact that he has to work until 70 despite wanting to retire early. I don't know many people who say, "I wish I'd saved less for retirement."
It's hard to predict inflation, your employment future, your health and costs associated with raising children. The more you save now, the more you benefit from compounding and the greater your ability to tolerate risks in your portfolio. The bigger your nest egg now, the earlier you will have the freedom to choose whether to work or not. You may think you want to work until 65, but you might feel differently in 20 years.
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Re: Replace less than 80% of income in retirement?
I had a similar problem. I solved it by retiring a few years early...Grt2bOutdoors wrote:Save early, save often. Make hay while the sun shines. The more you save today, the less you need to save tomorrow - you let compounding do the heavy lifting for you. BTW, my calculator says I'm on track to earn more in retirement than I do today - I don't buy it, not for a second...
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Re: Replace less than 80% of income in retirement?
Rather than discuss how much you should be saving as income for retirement, I will instead mention that saving more than your 7% should be less of a burden than you might imagine.
At $95k income, marginally you are paying 28% federal taxes + whatever you state taxes are. So every $1 more you contribution to a Traditional 401k is only $0.72 cents less you are bringing home. I myself am in the 28% tax bracket gross, but by maxing out my Traditional 401k I am saving significantly in taxes. My personal plan is to retire long before 65 (currently on track for 55 and I would like to make that 50). Plans may change as we also do not have children yet in our household.
But given that you are living on such a low amount of your income, I would recommend saving more now to be greedy on less taxes regardless of if you need that extra income in retirement. And as others have said, when kids come into the picture, it will be that much harder to save, so you can taper back if you need to.
At $95k income, marginally you are paying 28% federal taxes + whatever you state taxes are. So every $1 more you contribution to a Traditional 401k is only $0.72 cents less you are bringing home. I myself am in the 28% tax bracket gross, but by maxing out my Traditional 401k I am saving significantly in taxes. My personal plan is to retire long before 65 (currently on track for 55 and I would like to make that 50). Plans may change as we also do not have children yet in our household.
But given that you are living on such a low amount of your income, I would recommend saving more now to be greedy on less taxes regardless of if you need that extra income in retirement. And as others have said, when kids come into the picture, it will be that much harder to save, so you can taper back if you need to.
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Re: Replace less than 80% of income in retirement?
This, yes.HomerJ wrote:
...Increase your savings with each raise. If you get a $3000 raise, increase your savings by $1500, and increase your lifestyle by $1500...
If you follow this, you won't feel you are depriving yourself, and your savings rate will be quite high by your mid 40s.
If you are at all "normal", there's no need to be obsessive about saving the absolute max. Just increment your long-term savings by some amount each pay raise and spend the rest with wild abandon...
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Re: Replace less than 80% of income in retirement?
Few retirees look back on their lives and say "I sure wish I hadn't saved 10-15% of my gross income". It's no fun to be old and poor.
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Re: Replace less than 80% of income in retirement?
Those sorts of things are premised on the more typical US household that for the most part spend as much as they can except maybe for a little bit of retirement savings. It's always best to take a careful look at your own situation and lifestyle when setting a target/goal.
I'm planning on replacing only 20-30% of my gross income, and only about half that from my savings/investments. I'm probably atypical, but an example of someone who has done a lot of analysis/planning of my anticipated future lifestyle and built a target (in dollars) from the ground up. The percentage falls out from that, but it was not part of the planning.
I'm planning on replacing only 20-30% of my gross income, and only about half that from my savings/investments. I'm probably atypical, but an example of someone who has done a lot of analysis/planning of my anticipated future lifestyle and built a target (in dollars) from the ground up. The percentage falls out from that, but it was not part of the planning.
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Re: Replace less than 80% of income in retirement?
Well, I know it's not really possible to project what my expenses might be 35-40 years from now, let alone what my average returns will be. But it seems to reasonable to me that the every day expenses of life, such as food/utilities/etc., while costing more, should still eat out about the same percentage of income, assuming hyper inflation doesn't kick in, and make me wish I had invested in gold. For those of you who are in retirement now or close to it, would you say percentage/ratio wise, that the cost of the living hasn't changed all that much over the 20-30+ years you've saved for retirement?HomerJ wrote:Yes, it's not about income, it's about expenses... That 80% rule is hogwash.kingjimmy wrote:I know most financial advisors suggest you should save so as to to live off 80% of your gross income in retirement. However, I must ask, isn't replacing 80% of your current gross income a bit excessive?
But you may be too young to get a good idea of what your expenses will be in retirement... Save what you can now. Increase your savings with each raise. If you get a $3000 raise, increase your savings by $1500, and increase your lifestyle by $1500...
If you follow this, you won't feel you are depriving yourself, and your savings rate will be quite high by your mid 40s.
Jimmy
Jimmy
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Re: Replace less than 80% of income in retirement?
I'm not quite sure what your question is.kingjimmy wrote:
Well, I know it's not really possible to project what my expenses might be 35-40 years from now, let alone what my average returns will be. But it seems to reasonable to me that the every day expenses of life, such as food/utilities/etc., while costing more, should still eat out about the same percentage of income, assuming hyper inflation doesn't kick in, and make me wish I had invested in gold. For those of you who are in retirement now or close to it, would you say percentage/ratio wise, that the cost of the living hasn't changed all that much over the 20-30+ years you've saved for retirement?
Jimmy
I retired last year and my ending salary was something more than ten times my starting salary in 1973.
My house ($44,000 in 1976) is appraised at >10 times that now, though I added on.
My 1975 Saab, purchased for around $5500 makes my 2008 Mustang look really expensive.
I remember buying fresh fish for 79 cents a pound back in the '70s and now it's MORE than 10 times pricier.
So yes, you can expect certain expenses to increase by a factor of ten in 40 years or maybe a factor of 7 in 30 years.
It's still not clear how one can use that info for financial planning in the sense of targeting the "right" percentage of income to save for the long run...
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Re: Replace less than 80% of income in retirement?
OP, my wife and I are 30 and our combined income is around 130k. We are managing to save $35,000 a year to our 401ks. From 2010-2013 we were also able to max out out our Roth IRAs so we now have over 200k in retirement savings. It's a really good feeling knowing that we are putting ourselves in a position where we could conceivably retire modestly in our mid to late 40s if that is what we want, while most of our peers will be forced to work another 10 to 30 years.
However, some do not value that sort of future flexibility and there is nothing wrong with your current course as long as you are willing to accept the possible consequence that you may need to work for a decade or two after you have "burned out" on full-time work.
However, some do not value that sort of future flexibility and there is nothing wrong with your current course as long as you are willing to accept the possible consequence that you may need to work for a decade or two after you have "burned out" on full-time work.
Re: Replace less than 80% of income in retirement?
We definitely are trying to do this now. Outside of our retirement accounts, we are tossing an extra $500 a month beyond our minimum payments towards paying down our debt, and are trying to save about a thousand a month. We have a couple months saved away for an emergency fund, and are trying to beef it up a little more before the summer comes (she's a teacher, and won't get paid for 2 months). We are still newlyweds, so there are definitely some financial adjustments we are working through, and some less than ideal financial decisions made prior to marriage have to be taken care of. For example, the car she has now she had leased 3 years ago prior to me being in the picture, and we were put in the position where we basically had to buy the car out of the lease. Unfortunately, we just were not in the position to pay cash for it, so we put a healthy chunk down and financed the rest. But at this rate, we will be free of debts minus the mortgage in about 2-3 years. We could probably do it sooner, but I like the idea of building up savings while paying down debt, instead of doing everything strictly by the Dame Ramsey style.BL wrote:Why not open a Roth IRA? You won't pay anything on increases if you wait until retirement (fantastic deal!) and the amount you put in is accessible without cost should you really need it. It can be a back-up emergency fund. (You should have several months of emergency money.)
Also, save some money, or pay back some of your loans, so you don't have to borrow to buy cars, etc. Get out of debt, except for mortgage, asap.
But thinking about these things made me start to wonder about beefing up the retirement savings instead of dumping more money into debt repayment or a larger emergency fund. We definitely want to have a nice "nest egg" to sit on when we decide to get pregnant. Emotionally, I think I would personally feel better knowing I was sitting on an additional 20-30k in cash savings than seeing that same 20-30k in a retirement account. Especially if all the debts minus the mortgage are paid off.
Jimmy
Re: Replace less than 80% of income in retirement?
The Wizard wrote:I'm not quite sure what your question is.kingjimmy wrote:
Well, I know it's not really possible to project what my expenses might be 35-40 years from now, let alone what my average returns will be. But it seems to reasonable to me that the every day expenses of life, such as food/utilities/etc., while costing more, should still eat out about the same percentage of income, assuming hyper inflation doesn't kick in, and make me wish I had invested in gold. For those of you who are in retirement now or close to it, would you say percentage/ratio wise, that the cost of the living hasn't changed all that much over the 20-30+ years you've saved for retirement?
Jimmy
I retired last year and my ending salary was something more than ten times my starting salary in 1973.
My house ($44,000 in 1976) is appraised at >10 times that now, though I added on.
My 1975 Saab, purchased for around $5500 makes my 2008 Mustang look really expensive.
I remember buying fresh fish for 79 cents a pound back in the '70s and now it's MORE than 10 times pricier.
So yes, you can expect certain expenses to increase by a factor of ten in 40 years or maybe a factor of 7 in 30 years.
It's still not clear how one can use that info for financial planning in the sense of targeting the "right" percentage of income to save for the long run...
What I mean is, if it costs me 20% of my current budget to eat and pay utilities and such for general living expenses, 30 years from now can I expect it to still cost me about 20% of my income, assuming I was making the same income and that inflation was 0%?
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Re: Replace less than 80% of income in retirement?
Jimmy, there are ways to get cash out of retirement accounts should the need arise. Search the wiki for more info on it. I would let seeing $20-$30k in a retirement account versus a taxable account make any changes in my decisioning process. That said, I would always keep some funds "easily accessible". You never know when you need access to smaller sums of cash almost immediately. I doubt you would need $20k - $30k like that though.
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Re: Replace less than 80% of income in retirement?
That just depends but the same percentage is probably a good first approximation.kingjimmy wrote: What I mean is, if it costs me 20% of my current budget to eat and pay utilities and such for general living expenses, 30 years from now can I expect it to still cost me about 20% of my income, assuming I was making the same income and that inflation was 0%?
But in your 30's and 40's there can be a lot of acquisition expenses that largely go away or at least lessen in retirement.
But they can get replaced with higher HEALTHCARE expenses, so sometimes you can't win...
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Re: Replace less than 80% of income in retirement?
Yeah, that's an okay decent 1st approximation... But what if you get a bigger house, and the utilities go up, or someone invents the holodeck, and you have to pay $500 a month to keep that running?kingjimmy wrote:What I mean is, if it costs me 20% of my current budget to eat and pay utilities and such for general living expenses, 30 years from now can I expect it to still cost me about 20% of my income, assuming I was making the same income and that inflation was 0%?
You'll have to keep checking your expenses every 5-10 years to firm up your estimates. It's an iterative process.
Re: Replace less than 80% of income in retirement?
+1 You may have kids, health issues, employment issues and the like. Roth's contributions can be withdrawn. IDK about 401ks.The Wizard wrote:At the OP's age of 31, it's way too early to focus on end-game expenses and income.
The focus for the next few decades needs to be on maintaining and increasing your savings rate, though with child-rearing expenses, it may not be easy.
A higher savings rate gives you more options when you're in your 50's and that's good to have...
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
Re: Replace less than 80% of income in retirement?
You can expect anything you want. Reality might be different. Think medical cost expectations from 30 years ago. Or cell phone, computer, or internet costs from 30 years ago. Wait... those costs were zero...kingjimmy wrote:The Wizard wrote:I'm not quite sure what your question is.kingjimmy wrote:
Well, I know it's not really possible to project what my expenses might be 35-40 years from now, let alone what my average returns will be. But it seems to reasonable to me that the every day expenses of life, such as food/utilities/etc., while costing more, should still eat out about the same percentage of income, assuming hyper inflation doesn't kick in, and make me wish I had invested in gold. For those of you who are in retirement now or close to it, would you say percentage/ratio wise, that the cost of the living hasn't changed all that much over the 20-30+ years you've saved for retirement?
Jimmy
I retired last year and my ending salary was something more than ten times my starting salary in 1973.
My house ($44,000 in 1976) is appraised at >10 times that now, though I added on.
My 1975 Saab, purchased for around $5500 makes my 2008 Mustang look really expensive.
I remember buying fresh fish for 79 cents a pound back in the '70s and now it's MORE than 10 times pricier.
So yes, you can expect certain expenses to increase by a factor of ten in 40 years or maybe a factor of 7 in 30 years.
It's still not clear how one can use that info for financial planning in the sense of targeting the "right" percentage of income to save for the long run...
What I mean is, if it costs me 20% of my current budget to eat and pay utilities and such for general living expenses, 30 years from now can I expect it to still cost me about 20% of my income, assuming I was making the same income and that inflation was 0%?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Replace less than 80% of income in retirement?
Despite the common wisdom, expenses in retirement can well exceed pre-retirement income. The culprit is usually health care expenses not covered by Medicare/Medigap. Long-term care (either in-home or in a facility), assisted living, or just multiple Medicare/Medigap deductibles for "frequent fliers", it can add up. My Mom was spending easily 200% of her pre-retirement income on private-pay medical alone in the year before she died.
A handy "rule-of-thumb" is the cost, in today's dollars, of two folks in LTC, private-pay, semi-private (double occupancy).
Depending on your location, the tab might run about $150K/year. Subtract from that whatever stable income sources you expect (again, in today's dollars), and the "delta" is what you'll be paying from your retirement funds.
When calculating for the surviving spouse, don't forget that "stable income sources" often decrease upon the death of one spouse, e.g., one S/S payment (even with a survivor bump) is going to be less than two S/S payments. A pension payment may also decrease. You have to run the numbers.
A handy "rule-of-thumb" is the cost, in today's dollars, of two folks in LTC, private-pay, semi-private (double occupancy).
Depending on your location, the tab might run about $150K/year. Subtract from that whatever stable income sources you expect (again, in today's dollars), and the "delta" is what you'll be paying from your retirement funds.
When calculating for the surviving spouse, don't forget that "stable income sources" often decrease upon the death of one spouse, e.g., one S/S payment (even with a survivor bump) is going to be less than two S/S payments. A pension payment may also decrease. You have to run the numbers.
Re: Replace less than 80% of income in retirement?
I guess there is a case to be made to aggressively spend down retirement assets in your 60's and 70's while your health is still good. Once in your 80's if you need assisted living, medicaid is available. I'd rather live it up when I have my faculties than spend my life earnings on nursing homes when I am demented.Despite the common wisdom, expenses in retirement can well exceed pre-retirement income. The culprit is usually health care expenses not covered by Medicare/Medigap. Long-term care (either in-home or in a facility), assisted living, or just multiple Medicare/Medigap deductibles for "frequent fliers", it can add up. My Mom was spending easily 200% of her pre-retirement income on private-pay medical alone in the year before she died.
Re: Replace less than 80% of income in retirement?
Yes that is a huge wild card.Despite the common wisdom, expenses in retirement can well exceed pre-retirement income. The culprit is usually health care expenses not covered by Medicare/Medigap.
It can be mitigated with long term care insurance.
Unfortunately LTC insurance is very expensive, comes with lots of fine print, and has not shown itself to be a great deal so is hardly a silver bullet.
So this remains a major problem, it seems to me.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Replace less than 80% of income in retirement?
Rodc wrote:kingjimmy wrote:The Wizard wrote:kingjimmy wrote: You can expect anything you want. Reality might be different. Think medical cost expectations from 30 years ago. Or cell phone, computer, or internet costs from 30 years ago. Wait... those costs were zero...
Very good point. That really hits home with me. Not so much the medical expenses as the gadget expenses and technological developments, and the cost associated with it. Personally speaking (no matter what your politics is), I believe we'll probably be on full blown socialized healthcare/single-payer type system by the time I retire. Of course, I'll try to prepare as if we will not. But the political winds definitely seem to be blowing that way
(Note to moderator: I"m not attempting to incite a political discussion, just talking about theory here)
Re: Replace less than 80% of income in retirement?
Yes. Whether good or bad, that is another huge level of uncertainty. College costs of any potential children too as current tuition trends are not sustainable, and the open courses-ware movement may be hugely disruptive. Who knows?kingjimmy wrote:Rodc wrote:kingjimmy wrote:The Wizard wrote:kingjimmy wrote: You can expect anything you want. Reality might be different. Think medical cost expectations from 30 years ago. Or cell phone, computer, or internet costs from 30 years ago. Wait... those costs were zero...
Very good point. That really hits home with me. Not so much the medical expenses as the gadget expenses and technological developments, and the cost associated with it. Personally speaking (no matter what your politics is), I believe we'll probably be on full blown socialized healthcare/single-payer type system by the time I retire. Of course, I'll try to prepare as if we will not. But the political winds definitely seem to be blowing that way
(Note to moderator: I"m not attempting to incite a political discussion, just talking about theory here)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Re: Replace less than 80% of income in retirement?
At 31 it is far too early to stop driving toward the goal. People in your position in 2007 found out how rude and quick the change in fortune can be. No job is totally safe, no pension is either. Disability other health issues can put a real dent in savings/future earning power.
Cutting back a little depends on what you plan to do with the extra? If you have been extremely frugal then you may need to lighten up a bit. If you are going to buy some toys - maybe you should wait. Your life does need balance.
Cutting back a little depends on what you plan to do with the extra? If you have been extremely frugal then you may need to lighten up a bit. If you are going to buy some toys - maybe you should wait. Your life does need balance.
Re: Replace less than 80% of income in retirement?
Before retirement, income over $250,000 per year
After retirement, projected income needs of $45,000 per year
So we only need to replace 18% of pre-retirement income. Maybe 20% to account for the very little tax due.
80% would be crazy.
After retirement, projected income needs of $45,000 per year
So we only need to replace 18% of pre-retirement income. Maybe 20% to account for the very little tax due.
80% would be crazy.
Re: Replace less than 80% of income in retirement?
As a point of reference. I am 40. Wife does not work outside the home. 3 kids.
Our expenses are approximately 35% of gross annual income, not including taxes. I expect that number to get lower, not higher, in the future.
I can't imagine what we'd do with 80% of our gross income replacement in retirement.
That said. I would put as much as you possibly can afford into retirement savings before you start to feel pain. You'll be amazed at how easy it is to live on a little less and how that money will grow over time. Doing that becomes not a matter if IF you can retire, but WHEN you can retire. Having the freedom to choose that date, to me, is far more important than making sure I have the right amount.
Our expenses are approximately 35% of gross annual income, not including taxes. I expect that number to get lower, not higher, in the future.
I can't imagine what we'd do with 80% of our gross income replacement in retirement.
That said. I would put as much as you possibly can afford into retirement savings before you start to feel pain. You'll be amazed at how easy it is to live on a little less and how that money will grow over time. Doing that becomes not a matter if IF you can retire, but WHEN you can retire. Having the freedom to choose that date, to me, is far more important than making sure I have the right amount.
Re: Replace less than 80% of income in retirement?
Exactly.Jfet wrote:Before retirement, income over $250,000 per year
After retirement, projected income needs of $45,000 per year
We spend most of our accumulating lives deferring (not consuming) income to enable us to consume when the regular paychecks stop.
- 1. A 31yo needs balance in his/her life and projections 30 years-out are simply what they are.
2. Unless income [from savings] ≠ expenses in retirement, a conversation about target expenses versus income is all about nothing.
3. OP seems well aware of his current circumstances and wants to plan for short/mid/long-term savings.kingjimmy [OP] » Thu Mar 06, 2014 10:36 am wrote:I've thought about increasing my savings to my 401k, or opening a Roth IRA. However lately I've been asking myself is such really necessary, and if I wouldn't be better off just using the extra income I have to more short-term savings/spending goals with 5-10-15 year horizons. We don't have any kids right now, but plan on having some in about 2 years. I know most financial advisors suggest you should save so as to to live off 80% of your gross income in retirement. However, I must ask, isn't replacing 80% of your current gross income a bit excessive?
Right now my wife and I are living off about 51% of our gross annual income, and that includes a mortgage, 2 car payments, food, utilities, "fun money", savings, and paying off some minor credit card debt. If we are living off 51% of our gross annual income presently, and doing so comfortably, during retirement why would we need to replace 80% of our gross income, when we would expect to not have a mortgage, car payment, or credit card debt by then?
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Re: Replace less than 80% of income in retirement?
Thank you all for your thoughts.
For now, I've decided to increase my 401k contribution an additional 2%, and have turned on auto increments of 1% annually until it maxes out. I think I'll revisit the idea of a Roth IRA in about 2 years. Between my contribution, company match, annual profit sharing, and my wife's state retirement account, that will give an annual retirement contribution of aprox $11,460 a year right now. Making about 95-100k right now, I feel that's a healthy amount to be stashing away for retirement.
For now, I've decided to increase my 401k contribution an additional 2%, and have turned on auto increments of 1% annually until it maxes out. I think I'll revisit the idea of a Roth IRA in about 2 years. Between my contribution, company match, annual profit sharing, and my wife's state retirement account, that will give an annual retirement contribution of aprox $11,460 a year right now. Making about 95-100k right now, I feel that's a healthy amount to be stashing away for retirement.
Re: Replace less than 80% of income in retirement?
Yeah but those costs aren't for the entire 30 years, so one doesn't have to plan their "retirement income" around stuff like that. Just need a good buffer to pay for that.john94549 wrote:Despite the common wisdom, expenses in retirement can well exceed pre-retirement income. The culprit is usually health care expenses not covered by Medicare/Medigap. Long-term care (either in-home or in a facility), assisted living, or just multiple Medicare/Medigap deductibles for "frequent fliers", it can add up. My Mom was spending easily 200% of her pre-retirement income on private-pay medical alone in the year before she died.
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Re: Replace less than 80% of income in retirement?
The real problem is deciding which income...Jfet wrote:Before retirement, income over $250,000 per year
After retirement, projected income needs of $45,000 per year
So we only need to replace 18% of pre-retirement income. Maybe 20% to account for the very little tax due.
80% would be crazy.
Income at 40, Income at 50, Income the day before you retire?
My wife and I together made $200k-$250k for the last 7 years or so... Now she's retired, and we're living on $120k. So which income should I should be replacing? 80% of $250k? Or 80% of $120k?
What matters is our expenses... Our expenses remained constant around $75k (with the house paid off), no matter what our income is.. That's what we need to replace in retirement. That 80% income rule is a very poor rule of thumb...
Re: Replace less than 80% of income in retirement?
Things also kick in like full SS at age 70 which could offset the higher expenses as you get older.HomerJ wrote:Yeah but those costs aren't for the entire 30 years, so one doesn't have to plan their "retirement income" around stuff like that. Just need a good buffer to pay for that.john94549 wrote:Despite the common wisdom, expenses in retirement can well exceed pre-retirement income. The culprit is usually health care expenses not covered by Medicare/Medigap. Long-term care (either in-home or in a facility), assisted living, or just multiple Medicare/Medigap deductibles for "frequent fliers", it can add up. My Mom was spending easily 200% of her pre-retirement income on private-pay medical alone in the year before she died.
Of course LTC is a beast...you really need millions to prepare for that one and so I toss it out of the calculation.
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Re: Replace less than 80% of income in retirement?
You should focus on replacing the amount of funds that requires a zero cash outflow at the end of each month/year - cash in = cash out.HomerJ wrote:The real problem is deciding which income...Jfet wrote:Before retirement, income over $250,000 per year
After retirement, projected income needs of $45,000 per year
So we only need to replace 18% of pre-retirement income. Maybe 20% to account for the very little tax due.
80% would be crazy.
Income at 40, Income at 50, Income the day before you retire?
My wife and I together made $200k-$250k for the last 7 years or so... Now she's retired, and we're living on $120k. So which income should I should be replacing? 80% of $250k? Or 80% of $120k?
What matters is our expenses... Our expenses remained constant around $75k (with the house paid off), no matter what our income is.. That's what we need to replace in retirement. That 80% income rule is a very poor rule of thumb...
Now, I just need to remind myself of that each month, when I wonder will I have enough to retire at some point. That will depend where my retirement location will be and being able to maintain sufficient employment until retirement. First world problems, I know.
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Re: Replace less than 80% of income in retirement?
"That 80% income rule is a very poor rule of thumb..."
I agree that the focus should be on future expenses and that it isn't necessarily based on income. But I would bet that consumption spending was one of the guiding forces behind this rule. When people live a lifestyle where they are spending every last cent, being told that they'll need 80% of that income in retirement to sustain their lifestyle may not be off the mark. Also, it's much easier for the Average Jane or Joe to calculate how much 80% of income is versus doing the work to see how much they are spending annually and then figuring out what makes sense for expenditures in retirement. Never underestimate the role of complexity and/or laziness in the development of "rules of thumb". Also, plenty of people blame the financial services industry for this rule in attempt to drum up business. I wouldn't put it past them.
For those on the con side of this rule, here's an article taking that side. The "White Coat Investor" also took on this topic on his blog.
I agree that the focus should be on future expenses and that it isn't necessarily based on income. But I would bet that consumption spending was one of the guiding forces behind this rule. When people live a lifestyle where they are spending every last cent, being told that they'll need 80% of that income in retirement to sustain their lifestyle may not be off the mark. Also, it's much easier for the Average Jane or Joe to calculate how much 80% of income is versus doing the work to see how much they are spending annually and then figuring out what makes sense for expenditures in retirement. Never underestimate the role of complexity and/or laziness in the development of "rules of thumb". Also, plenty of people blame the financial services industry for this rule in attempt to drum up business. I wouldn't put it past them.
For those on the con side of this rule, here's an article taking that side. The "White Coat Investor" also took on this topic on his blog.
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