Retirement percentage advice in question

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Retirement percentage advice in question

Post by JohnnyO » Sat Feb 22, 2014 11:44 am

First off, I am normally not a poster but a reader of everyone else's advice which has been incredibly helpful since I joined. A question that has been bugging me for the last couple of years is the retirement advice that you should plan to retire on somewhere between 80 - 100% of your current income. Based off of that you put as much as you can away in tax shelter accounts to try and meet those future needs.

I want to throw out another viewpoint which I am sure is already out there for comment somewhere. My wife and I are approximately 6 years out from our planned early retirement. It has been our goal for over 10 years now to work diligently and be disciplined in savings in 401k, 457, and 403, and ROTH's, so that we can successfully retire at age 56.

I gave up the notion of trying to live off of 80 - 100% of our current income as it finally occurred to me that I might be looking at it all wrong. What I really need to be looking at is not my gross earnings, but my net earnings. You see our plan includes making our last house payment a few months before we both retire. While we will not meet even the 80% of current income, when we retire, we will retire at 139.5% of our current net pay at 56, and that will rise to $175% of our current net pay at age 60. At 60 our plan is to only take 2.5% yearly out of retirement funds until 65, along with our pension.

This does not include the annual inflation, cost of living that will eat away at those numbers, but it does include a large $$$ amount for future medical premiums and costs which are truly the joker in the mix anyway. I build spreadsheets until my spouse is dizzy to keep looking at everything from as many different viewpoint as possible.

We are not living in a box now, we live very well (comfortable), pay a rather high house payment on a 15 year mortgage, travel as much as we can now (balanced), and put 24% of our earnings (150K combined) into retirement accounts split between those listed above and both of our pensions. So should we really be focusing more on what a person(s) net pay will be in retirement not their gross pay? It would seem like a much easier way to see just how far your money might go to accomplish all the things you want to do in retirement??

Thoughts?? :beer


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Re: Retirement percentage advice in question

Post by dbr » Sat Feb 22, 2014 11:48 am

You should start the problem by estimating the actual cost of all the things you spend money on. This has nothing to do with fractions of some earnings. The best way is to have a history of tracking what you actually spend and then modifying that by what you think will change in retirement. There will be categories of spending that are one-time, or at least very lumpy, so you'll have to keep account of that as such. Part of the importance of this is to continue to track spending after retirement to make sure your assumptions are actually realized. You can't do that without a baseline.

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Re: Retirement percentage advice in question

Post by livesoft » Sat Feb 22, 2014 11:51 am

I guess we didn't ever look at earnings. Instead we looked at our expenses. If before retirement I save 50% of my gross income and live off of 50% including taxes, then in retirement I would expense to pay less in taxes, so that my expenses will go down. I know what those expenses are, so that I can work my sustained withdrawal rate (SWR) off of those expenses and not from some percentage of before-retirement income. However, I can always convert one to the other if I wanted to.
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Re: Retirement percentage advice in question

Post by Peter Foley » Sat Feb 22, 2014 11:53 am

Net earning is ok but a bit better approach is to track you current fixed expenses and those additional ones (health insurance) you will have when you retire. If you know what you are going to do when you retire, you can then estimate what your more flexible annual spending will be. Adding the two will get you close.

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Re: Retirement percentage advice in question

Post by longinvest » Sat Feb 22, 2014 2:29 pm

We've been tracking all our expenses in GnuCash for the last 10 years. This allows us to have a pretty clear picture of our fixed and variable expenses.

From there, we go in reverse to estimate our retirement income needs. Starting from our expenses, we compute the required before-tax amount. We add to it a security margin and use the result for planning.
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Re: Retirement percentage advice in question

Post by dbphd » Sat Feb 22, 2014 3:16 pm

We use Quicken to track income and expenses, with accounts for everything, checking, credit cards, Vanguard, TIAA-CREF, real property, and so forth, and never classify any expense as miscellaneous. After 20 years of retirement experience, our goal is to keep expenses within COLA pension and social security income, and we find that we can live comfortably doing that without concern about fluctuations in the markets. The advice OP got about understanding expenses is much more important than any formulaic percentage of current income for retirement.

My wife and I both retired at 56, she 3 years after me.


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Re: Retirement percentage advice in question

Post by Leeraar » Sat Feb 22, 2014 3:17 pm


I saw it as a matter of cash flow. All of our cash flow goes through one checking account. All I now do is glance at the balance once a month or so. (All the income goes in there. All the bills are auto-paid. I rarely write a check.)

Make a list of expenses you will and will not have when you retire. Commuting, clothes, savings into 401k, house mortgage, car payment, ... I think you only have to look at the changes, if you are planning to more or less continue your lifestyle.

Make a list of significant dates: When you retire, age 59 1/2, age 62, age 65, age 70. Same for your partner. Now, look at the decisions: Start IRA/401k withdrawals, claim SS, start pension, start RMDs, ...

You are probably looking at a fairly nonuniform cash flow requirement at least until age 70. We are putting a kid through college and delaying SS. That means a bit of spending forward from our savings. I found it very difficult to transition from saving to spending. It would have been much easier to claim SS at age 62 than to tap savings and delay SS, but we have made the right decision.

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Re: Retirement percentage advice in question

Post by JohnnyO » Sun Feb 23, 2014 10:27 am

And this is why I think this forum is so great. Thank you, each one who responded or your thoughts and advice. I got some great ideas, some I knew of, and some I didn't, and will put into play as we get closer. We have several different scenarios written down for how our financial picture will look based on all those things we can't control. Your input has help emphasize some of those very issues.

Thank you Bogleheads!!

Johnny-O :sharebeer

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Re: Retirement percentage advice in question

Post by rotorhead » Sun Feb 23, 2014 11:07 am

Another thing you might do is create a 50/30/20 budget worksheet, to see where your expenses are going to be. This is a very effective tool to put things in perspective; and help with the decisions needed to accomplish your goal.

Here is link to one website that has info on the budget:

There are many others, but this one is OK for starters.

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Re: Retirement percentage advice in question

Post by manwithnoname » Sun Feb 23, 2014 12:05 pm

You need to track your expenses because that is the most accurate way to know what your are spending. You can deduct expenses that will be gone when you retire such as commuting costs, employment expenses, etc. Add in health insurance. Another thing that is overlooked is that taxes will decline in retirement if you will have less income. You will save the 7.65% FICA tax. If your tax deductions remain the same your taxable income will decline. Some states exclude all or some portion of retirement benefits, e.g, NY excludes $20,000 per person or you can move to a state that has no income tax and/or pay off the mortgage.

You can make Roth conversions in a lower tax bracket before you start to receive SS or retirement benefits to reduce income tax when mandatory retirement benefits commence at 70 1/2.

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