Will I really need 80% replacement during retirement?

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rhornback
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Will I really need 80% replacement during retirement?

Post by rhornback »

I recently logged into my corporate retirement account and it told me that it expected I would need $$$ a year in retirement. I suspect it came up with that number based on 80% of my salary. I suspect that is a well known argument. A simple google shows:

"According to AARP, one common rule of thumb is that you'll need 70% to 80% of your pre-retirement income after you retire. So if you made an average of $75,000 per year during your working years, you may only need $52,500 to $60,000 in retirement."

I recently watched Amazon Prime week come and go and concurrently there were Early Black Friday sales at Target, Best Buy, and Walmart. While I found it interesting that purchase a Kindle Fire 10" at a discounted price I had no interest. Another interesting data point is I suspect the biggest monthly expense for my parents is Dish Network. Admittedly they are 86 and 85 and I pay for a many of their groceries and their expenses when we get together (out of respect and because I can afford it).

I drive a 2004 minivan with 200K miles on it. I enjoy going on vacation but I am OK staying at a budget hotel (as long as it is rated as clean). My favorites are Marriott Staybridge but Marriott Fairfield and Holiday Inn Express are quite acceptable to me. I do always look for a free breakfast. I fly coach. Sometimes I look for discounts online or groupons for tourist sites when I travel :).

What I am getting at in my long-winded way is I wonder what will be my realistic spend percentage at retirement. The older I get the less interested I am in spending on 'new stuff'. My 'old stuff' seems quite adequate. And I am pretty happy with a modest lifestyle.

I suspect my actual spend rate in retirement will be less than 80%.
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FiveK
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Re: Will I really need 80% replacement during retirement?

Post by FiveK »

rhornback wrote: Sun Oct 25, 2020 5:36 pm What I am getting at in my long-winded way is I wonder what will be my realistic spend percentage at retirement.
It will be whatever you spend, divided by your annual salary from when you were working.

The 80% estimate is probably the right order of magnitude, but looking at your actual spending for the past few years and adjusting line items with your best guesses may be more accurate.
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JoeRetire
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Re: Will I really need 80% replacement during retirement?

Post by JoeRetire »

rhornback wrote: Sun Oct 25, 2020 5:36 pmAnother interesting data point is I suspect the biggest monthly expense for my parents is Dish Network.
For most older folks, healthcare would cost more than television.
What I am getting at in my long-winded way is I wonder what will be my realistic spend percentage at retirement.

I suspect my actual spend rate in retirement will be less than 80%.
Most folks aren't able to save much of their income. For them, 80% may well be realistic.

For others (including most folks here), a more accurate estimate would be about 100% of their expenses, rather than a percentage of income.
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rockstar
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Re: Will I really need 80% replacement during retirement?

Post by rockstar »

rhornback wrote: Sun Oct 25, 2020 5:36 pm I recently logged into my corporate retirement account and it told me that it expected I would need $$$ a year in retirement. I suspect it came up with that number based on 80% of my salary. I suspect that is a well known argument. A simple google shows:

"According to AARP, one common rule of thumb is that you'll need 70% to 80% of your pre-retirement income after you retire. So if you made an average of $75,000 per year during your working years, you may only need $52,500 to $60,000 in retirement."

I recently watched Amazon Prime week come and go and concurrently there were Early Black Friday sales at Target, Best Buy, and Walmart. While I found it interesting that purchase a Kindle Fire 10" at a discounted price I had no interest. Another interesting data point is I suspect the biggest monthly expense for my parents is Dish Network. Admittedly they are 86 and 85 and I pay for a many of their groceries and their expenses when we get together (out of respect and because I can afford it).

I drive a 2004 minivan with 200K miles on it. I enjoy going on vacation but I am OK staying at a budget hotel (as long as it is rated as clean). My favorites are Marriott Staybridge but Marriott Fairfield and Holiday Inn Express are quite acceptable to me. I do always look for a free breakfast. I fly coach. Sometimes I look for discounts online or groupons for tourist sites when I travel :).

What I am getting at in my long-winded way is I wonder what will be my realistic spend percentage at retirement. The older I get the less interested I am in spending on 'new stuff'. My 'old stuff' seems quite adequate. And I am pretty happy with a modest lifestyle.

I suspect my actual spend rate in retirement will be less than 80%.
My biggest expense right now is my mortgage. Once it's paid off, I expect to spend a tiny fraction of my salary. I will definitely spend less than 80%.
ROIGuy
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Re: Will I really need 80% replacement during retirement?

Post by ROIGuy »

Track your expenses (in detail) for 1-2 years. It will go a long way in learning about how much you will need in retirement. If you do this, whatever number you come up with and another $3,000-$4,000 a year for surprises.
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Re: Will I really need 80% replacement during retirement?

Post by Jack FFR1846 »

These percentages are for people who are incapable of figuring out what they spend now and what they will spend in retirement. DW and I spent many years with $150k-ish income and $50k-ish spending. I laugh at 80% and honestly think I would need to regularly buy a new Porsche to spend 80%.

Just make a list of what you spend annually. Figure out the stuff that will change when you retire and estimate what those things will cost.
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Vtsax100
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Re: Will I really need 80% replacement during retirement?

Post by Vtsax100 »

I will need no where near 80%. My main expense will be healthcare. I really don't spend much on anything else.
stan1
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Re: Will I really need 80% replacement during retirement?

Post by stan1 »

No where near 80% because I save close to 40% and pay social security and medicare taxes. That all stops if I'm not working.

Run the numbers yourself. National averages and experts who have never met you are meaningless.
stoptothink
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Re: Will I really need 80% replacement during retirement?

Post by stoptothink »

Jack FFR1846 wrote: Sun Oct 25, 2020 5:47 pm These percentages are for people who are incapable of figuring out what they spend now and what they will spend in retirement. DW and I spent many years with $150k-ish income and $50k-ish spending. I laugh at 80% and honestly think I would need to regularly buy a new Porsche to spend 80%.

Just make a list of what you spend annually. Figure out the stuff that will change when you retire and estimate what those things will cost.
This. Considering we're currently saving 55%+ of gross income, buying a new Porsche every year would be necessary for us to need 80% of our income in retirement. Just another rule of thumb that is irrelevant for most of us on this board.
Normchad
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Re: Will I really need 80% replacement during retirement?

Post by Normchad »

Those are common suggestions. Frankly, they are basically garbage.....

It’s only true if you currently spend 80% of whatever you make. And this might be true for a lot of people. But for this, what matters is you, not some average or vague guideline.

What you need to replace is your expenses. And that might be related to your income or it might not.

A rough guide around here is to figure out what you need to spend in retirement. Take current expenses, and adjust it for your situation. Take out commuting costs and retirement savings. Add in travel costs, etc. make sure to accurately account for healthcare. After you have that number, subtract any pension you will be getting. Whatever that number is, say $35K/year or whatever, you will be aiming to have 25x that amount, or a bit more. But somehow in that ballpark.

There is a lot more to it than that. The wiki on this site is a treasure trove of well curated information. Read through it and ask questions.
trueblueky
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Re: Will I really need 80% replacement during retirement?

Post by trueblueky »

Even if you currently spend 80% of what you make, you may not need that much in retirement.

Before I retired, I looked at my pay slip. For each item, I asked if I would spend that in retirement. FICA - no. Pension contribution - no. Health, LTC, vision insurance - yes. Federal income tax - lower based on lower income. Etc.

2/3 of my pre-retirement income would have been plenty. We moved to a lower cost area with no state income tax on retirement and finished paying last child's college. Some of that is highly individual; as is the answer for you.

80% is just a rule of thumb.
mr_brightside
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Re: Will I really need 80% replacement during retirement?

Post by mr_brightside »

trueblueky wrote: Sun Oct 25, 2020 6:23 pm

80% is just a rule of thumb.
+1

plus i've seen it written your 'retirement years' can be divided into :

GO years -- probably closer to 100% income -- lots of travel / activities -- still in good health
SLOW GO years -- still active but picking and choosing more based on mobility / health
NO GO years -- health fading a bit -- maybe just staying close to the homestead for health / mobility reasons

I'm a few years out myself so I'm planning on the 80% figure.... we'll see
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GerryL
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Re: Will I really need 80% replacement during retirement?

Post by GerryL »

I hate that "80% replacement" trope. It's a lazy shortcut. As others here have said, it's not the income, it's the outgo.

Understand your expenses before you try to guesstimate what income you will want to live on.
arsenalfan
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Re: Will I really need 80% replacement during retirement?

Post by arsenalfan »

So figure it out.
Housing, Vehicles, Food, Utilities, Healthcare, Insurances.
Then Discretionary: Entertainment, Travel, Gifts, Philanthropy.
Then figure out where that $$ is coming from, and factor in tax payments on the sources.
absolute zero
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Re: Will I really need 80% replacement during retirement?

Post by absolute zero »

Jack FFR1846 wrote: Sun Oct 25, 2020 5:47 pm These percentages are for people who are incapable of figuring out what they spend now and what they will spend in retirement.
+1

What’s the Bill Bernstein quote? Something like “for the majority of the population, fractions are a stretch.”

I understand the need for rules of thumb regarding how much to save each year, e.g. save 15% of income. Very few people are capable of using reasonable return expectations and building their own tool to simulate potential retirement outcomes based upon their chosen savings rate, equity allocation, time horizon, etc.

But how much to spend once retired? Kind of a bummer that many people are unable/unwilling to examine their own expenses and make an estimate themselves.
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Watty
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Re: Will I really need 80% replacement during retirement?

Post by Watty »

rhornback wrote: Sun Oct 25, 2020 5:36 pm "According to AARP, one common rule of thumb is that you'll need 70% to 80% of your pre-retirement income after you retire. So if you made an average of $75,000 per year during your working years, you may only need $52,500 to $60,000 in retirement."
If your income was $75K when working you would also have about 7.65% FICA taxes and maybe 10%+ so when you subtract those out that would almost put you into that income range so it does not sound unreasonable.

Where the percent of income rule of thumb breaks down is that if your income while working was twice as high and you make $150K while working then lot of your retirement expenses will not double. For example your healthcare, food, utilities, etc would not double.
tibbitts
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Re: Will I really need 80% replacement during retirement?

Post by tibbitts »

rhornback wrote: Sun Oct 25, 2020 5:36 pm I drive a 2004 minivan with 200K miles on it. I enjoy going on vacation but I am OK staying at a budget hotel (as long as it is rated as clean). My favorites are Marriott Staybridge but Marriott Fairfield and Holiday Inn Express are quite acceptable to me. I do always look for a free breakfast. I fly coach. Sometimes I look for discounts online or groupons for tourist sites when I travel :).
Realistically your minivan is at the end of its life so that will be an expense. None of the hotels you mentioned are "budget" by any stretch of the imagination, and no hotels that I'm aware of provide free breakfasts any longer (well, unless you count the cellophane-wrapped Korean-war-surplus pastry that will be compressed to pass under your door.)
Last edited by tibbitts on Mon Oct 26, 2020 8:11 am, edited 2 times in total.
Dottie57
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Re: Will I really need 80% replacement during retirement?

Post by Dottie57 »

FiveK wrote: Sun Oct 25, 2020 5:41 pm
rhornback wrote: Sun Oct 25, 2020 5:36 pm What I am getting at in my long-winded way is I wonder what will be my realistic spend percentage at retirement.
It will be whatever you spend, divided by your annual salary from when you were working.

The 80% estimate is probably the right order of magnitude, but looking at your actual spending for the past few years and adjusting line items with your best guesses may be more accurate.
A few addition to ehat you spend today

What you spend today from net paycheck +. Taxes + medical ins.
manatee2005
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Re: Will I really need 80% replacement during retirement?

Post by manatee2005 »

My largest expenses currently are

1. My mortgage
2. Retirement savings (401k, roth)
3. Federal and state taxes
4. Commuting (work)
5. Vacations to rest from work.

By the time I am retired, I will have the mortgage paid off. I also won't need to pay into 401k and I won't have to spend money on work stuff. I won't need to pay high taxes and I won't need to take vacations.

I expect my main costs will be

1. Food
2. Utilities
3. Travel

Also the percentage means nothing. If somebody is spending 50k in retirement, if they were making 50k in retirement it means they need 100%. If they were making 100k it means they need 50%. What you made the year of retirement is meaningless. Let's say your income jumps to 200k in the last year, does that mean you should be spending 160k per year in retirement? The 80% number is so ridiculous.
RetiredAL
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Re: Will I really need 80% replacement during retirement?

Post by RetiredAL »

I retired in 2016 and we are doing fine on 65% of my pre-retirement gross.

My calcs started with my bring home pay, then I subtracted the taxable income that went to bank savings and our ROTHs. That amount is what I would need to net from our SS and IRAs.

The only big expense to date was the roof replacement and I started retirement with most of that money already set aside in a savings account.

A big factor was that our total income tax bill ( Fed + CA ) dropped by 70%.
Trader Joe
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Re: Will I really need 80% replacement during retirement?

Post by Trader Joe »

rhornback wrote: Sun Oct 25, 2020 5:36 pm I recently logged into my corporate retirement account and it told me that it expected I would need $$$ a year in retirement. I suspect it came up with that number based on 80% of my salary. I suspect that is a well known argument. A simple google shows:

"According to AARP, one common rule of thumb is that you'll need 70% to 80% of your pre-retirement income after you retire. So if you made an average of $75,000 per year during your working years, you may only need $52,500 to $60,000 in retirement."

I recently watched Amazon Prime week come and go and concurrently there were Early Black Friday sales at Target, Best Buy, and Walmart. While I found it interesting that purchase a Kindle Fire 10" at a discounted price I had no interest. Another interesting data point is I suspect the biggest monthly expense for my parents is Dish Network. Admittedly they are 86 and 85 and I pay for a many of their groceries and their expenses when we get together (out of respect and because I can afford it).

I drive a 2004 minivan with 200K miles on it. I enjoy going on vacation but I am OK staying at a budget hotel (as long as it is rated as clean). My favorites are Marriott Staybridge but Marriott Fairfield and Holiday Inn Express are quite acceptable to me. I do always look for a free breakfast. I fly coach. Sometimes I look for discounts online or groupons for tourist sites when I travel :).

What I am getting at in my long-winded way is I wonder what will be my realistic spend percentage at retirement. The older I get the less interested I am in spending on 'new stuff'. My 'old stuff' seems quite adequate. And I am pretty happy with a modest lifestyle.

I suspect my actual spend rate in retirement will be less than 80%.
Yes, 80% is a good rule of thumb.
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Re: Will I really need 80% replacement during retirement?

Post by nisiprius »

As reported as "Total Income" on our tax returns, our income in 2019 was 77% of what it was in 2010. Allowing for inflation, that would be 65%.

I believe that it's in the self-interest of investment firms to "upsell" you on the amount of replacement income you will need. There's a book by Charles Schwab that suggests 100%, and no particularly reason is given for the number beyond pointing out how much nicer it would be to have 100% rather than 70-80%.

A big factor is that when you are in retirement, you are no longer saving for retirement!

It is very hard to compare but we have not felt any "pinch" at all, in fact things seem if anything easier. The only major cutback is from two cars to one, but that has turned out to be almost entirely painless. Before retirement I thought we'd be occasionally renting cars or taking taxis or Uber for those occasions when we both needed the car at the same time, but so far it hasn't happened. I haven't tried to analyze all of the various life style changes or their up and down contributions to the budget.

So far we have not moved (and have no plans to move) to a lower cost-of-living place, nor downsize our house (which is bigger than we need, but qualifies as the largest possible size for a "tiny house.") We replaced our nine-year-old car in 2018, same make and model but at the top rather than the bottom of the trim line, paying 30% more. I mean, no problems. This year we're paying much much more for groceries because we've having everything delivered via InstaCart because of the pandemic, and... it all seems OK.
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delamer
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Re: Will I really need 80% replacement during retirement?

Post by delamer »

If you save 10% of your gross for retirement, spend 20% of your gross on your mortgage (which you plan to have paid off by retirement), and pay another 8% in payroll taxes, you are at needing 62% of salary in retirement, all else being equal (certain decreases in expenses, like commuting costs and income taxes may be offset by increases like travel and medical).

But as others have pointed out, the best way to figure out what you need in retirement is to track your actual expenses now and adjust appropriately.
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rgs92
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Re: Will I really need 80% replacement during retirement?

Post by rgs92 »

Don't forget healthcare-related things like Longterm Care Insurance, Medicare and Medicare Supplement premiums, Prescription Drug plan premiums, Dental Insurance, and more. I would try and estimate what these all will cost in retirement and include them in any budget.

These could easily be about $1500-2000/month now for a couple, and considerably more in a future retirement.
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Re: Will I really need 80% replacement during retirement?

Post by tibbitts »

In my case I underestimated taxes in retirement. While you're working, you have deductions (401k, 403b, 457 etc.) from your income, then in retirement you start drawing and paying taxes on deferred income. In a way you're worse off if you've contributed as much as possible to deferred accounts, and may actually end up in a higher tax bracket (especially if you're trying to get in Roth conversions before SS at 70 - there aren't that many years to cram those in if you retire at a fairly typical age.
softwaregeek
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Re: Will I really need 80% replacement during retirement?

Post by softwaregeek »

I fail to see how you can come up with a single number given the progressive income tax.

if you make $50k, you are paying very little except payroll tax.
If you make $500k, you are paying a third or more (in my state, much more) of your income in tax.

How can you have just one number for this?
Spirit Rider
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Re: Will I really need 80% replacement during retirement?

Post by Spirit Rider »

Not too mention, there is your gross expenses and there is your net portfolio income requirements after other income sources (SS, pension, etc...)

The total PIA percentage of your AIME is highly dependent on your SS earnings credits. Someone with an average of 1/2 the SS maximum taxable earnings will get ~40% of their average earnings. Someone with 2X will get ~15%.

Net portfolio income requirements can be substantially less than 80% for many people even if their gross expenses are 80%.
fyre4ce
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Re: Will I really need 80% replacement during retirement?

Post by fyre4ce »

For an average American with a low/middle income, with a relatively low tax burden, and who spends most of what they make, 80% of salary might be a reasonable number. For an average Boglehead with a middle/high income, relatively high tax burden, is smart with investments, and who saves a large fraction of their income, 80% of salary is very unreasonable. White Coat Investor had a great post on this from a while back, where he came up with a number of 28% of income. Yes, you read that right. It's best to run your own numbers rather go by a rule of thumb. At a minimum, start by looking at your current expenses, rather than income.
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Re: Will I really need 80% replacement during retirement?

Post by RetiredAL »

rgs92 wrote: Sun Oct 25, 2020 10:06 pm Don't forget healthcare-related things like Longterm Care Insurance, Medicare and Medicare Supplement premiums, Prescription Drug plan premiums, Dental Insurance, and more. I would try and estimate what these all will cost in retirement and include them in any budget.

These could easily be about $1500-2000/month now for a couple, and considerably more in a future retirement.
In my case, our Medicare + Supplement + D + RX out-of-pocket + dental cash-pay worked out to be just about the same as my per-pay medical/dental + the yearly deductible + office co-pays + RX out-of-pocket. Once I determined that, medical cost was never used again in my retirement modeling. I am a high maintenance person and always blew through the annual deductibles quickly.
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Re: Will I really need 80% replacement during retirement?

Post by MathIsMyWayr »

Jack FFR1846 wrote: Sun Oct 25, 2020 5:47 pm These percentages are for people who are incapable of figuring out what they spend now and what they will spend in retirement.
are incapable of not interested in figuring out
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Re: Will I really need 80% replacement during retirement?

Post by MathIsMyWayr »

absolute zero wrote: Sun Oct 25, 2020 7:36 pm
Jack FFR1846 wrote: Sun Oct 25, 2020 5:47 pm These percentages are for people who are incapable of figuring out what they spend now and what they will spend in retirement.
+1

What’s the Bill Bernstein quote? Something like “for the majority of the population, fractions are a stretch.”

I understand the need for rules of thumb regarding how much to save each year, e.g. save 15% of income. Very few people are capable of using reasonable return expectations and building their own tool to simulate potential retirement outcomes based upon their chosen savings rate, equity allocation, time horizon, etc.

But how much to spend once retired? Kind of a bummer that many people are unable/unwilling to examine their own expenses and make an estimate themselves.
Am I listening to a Nobel lecture by a distinguished scholar?
Ivygirl
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Re: Will I really need 80% replacement during retirement?

Post by Ivygirl »

I will offer a perspective from a middle-income person who makes about 56k a year. I posted this in a different thread:

I recently did a calculation as to what my own retirement might look like. I'm in my mid-50s. Retirement age of 70.

Social security income: $28,188/yr. or $2,349/mo.

Medicare Part A ($0), Part B ($145/mo.), Part D ($42/mo.), Supplement ($126/mo.) = $313/mo.

Housing: Mortgage $0 house paid off, Taxes $1,203/yr., Insurance $1,608/yr., Utilities $3,000/yr., Maintenance at 2% of home's value $2,000/yr.
Annual $7,811, divided by 12 = $651/mo.

Food using Moderate Cost USDA estimate: $263/mo.

Internet and cell phone: $105/mo.

Transportation: $2,000/yr. saved for the next car, car insurance $700/yr., car maintenance estimate $500/yr., Gasoline $840/yr.

Annual $4,040, divided by 12 = $337/mo.

Total expenses: $1,669/mo.


The Social Security income I expect is 50% of my current income, and it has $680 of slack before I am out of money for the month. Everything major is covered even without using my investments. Having the house paid off by retirement is the key.

Elaborate math isn't required to figure out what one will need in retirement. I think the tough part is accepting that one will have limitations - forever. People don't think about it for the same reason they don't make budgets at all, because the idea of being limited bothers them too much.
jucor
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Re: Will I really need 80% replacement during retirement?

Post by jucor »

softwaregeek wrote: Sun Oct 25, 2020 10:14 pm I fail to see how you can come up with a single number given the progressive income tax.

if you make $50k, you are paying very little except payroll tax.
If you make $500k, you are paying a third or more (in my state, much more) of your income in tax.

How can you have just one number for this?
I agree with your basic premise that one number is too simplistic and not very useful, but your assertion of percentages paid in taxes are way off.

A bit tangential, but for almost all folks your hypotheticals are simply not the case.

The absolute worst case scenario is if If you are single and making $500k/yr and living in California and take no deductions other than the standard you'd be at about 41% in total taxes including FICA and all Federal and California taxes. The vast majority of folks will not be in this category -- even if they made that much and lived in California, it is highly unlikely they'd have no deductions.

If you are going to make the argument that your $500k earner has zero deductions then you need to do the same for your $50k earner -- in that case in California that hypothetical single person with no deductions would be paying about 21% in total taxes.

You can use online tax calculators to confirm my numbers.

Neither scenario is very likely.
jeffreys
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Re: Will I really need 80% replacement during retirement?

Post by jeffreys »

We were discussing this the other day and in our case, we can't see how our expenses will decrease.

We've tracked all of our income and expenses in Quicken for well over 20 years so I can easily run a report to see our annual expenses. For income, we just record our net salary and do not track the withholdings. So our annual expenses don't include FICA or 401k withholdings. Annual expenses for the last 12 months have been $65,000 which is down due to COVID and $70,000+ is probably more accurate.

The majority of those expenses are vacations, eating out (obviously those 2 are way down for 2020), taxes (we've had to make estimated tax payments due to capital gains), household improvements/expenses, utilities and groceries. I don't see any of those changing in retirement (the estimated tax payments may continue with Roth conversions). Plus, assuming we retire early, we need to add health care, and ideally, increase vacations. We don't have any expenses related to our jobs including commuting because we both work from home. Our mortgage payment is pretty small so that won't be a significant change in our expenses.

Am I missing something as to where or how our expenses would go down?
Last edited by jeffreys on Mon Oct 26, 2020 7:41 am, edited 1 time in total.
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oldcomputerguy
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Re: Will I really need 80% replacement during retirement?

Post by oldcomputerguy »

Mr.BB wrote: Sun Oct 25, 2020 5:46 pm Track your expenses (in detail) for 1-2 years. It will go a long way in learning about how much you will need in retirement. If you do this, whatever number you come up with and another $3,000-$4,000 a year for surprises.
In fact I did something just about like this in the years leading up to my retirement. I took a look at my monthly and annual expenses, figured out what likely would change after retirement (for example, monthly gas expenses went way down while streaming costs went up), and based my target on that calculation. (In the process I learned some Excel skills. :wink: )

To the OP, there are many people out there that will make general statements about how much retirement savings or income one "has to have" before they can retire. Their generalized statements are invalid simply because they have no idea how much you need to live in your particular situation now, so they cannot possibly know how much you will need to meet your expenses in retirement. Nor do they know how your particular situation will and won't change once you're in retirement.
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Monster99
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Re: Will I really need 80% replacement during retirement?

Post by Monster99 »

Don't forget about hobbies, pets, social activities, charities, etc. To get a real picture as others have stated, you need to track expenses - in retirement income is fairly stable and the expenses matter.
smitcat
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Re: Will I really need 80% replacement during retirement?

Post by smitcat »

jucor wrote: Mon Oct 26, 2020 7:16 am
softwaregeek wrote: Sun Oct 25, 2020 10:14 pm I fail to see how you can come up with a single number given the progressive income tax.

if you make $50k, you are paying very little except payroll tax.
If you make $500k, you are paying a third or more (in my state, much more) of your income in tax.

How can you have just one number for this?
I agree with your basic premise that one number is too simplistic and not very useful, but your assertion of percentages paid in taxes are way off.

A bit tangential, but for almost all folks your hypotheticals are simply not the case.

The absolute worst case scenario is if If you are single and making $500k/yr and living in California and take no deductions other than the standard you'd be at about 41% in total taxes including FICA and all Federal and California taxes. The vast majority of folks will not be in this category -- even if they made that much and lived in California, it is highly unlikely they'd have no deductions.

If you are going to make the argument that your $500k earner has zero deductions then you need to do the same for your $50k earner -- in that case in California that hypothetical single person with no deductions would be paying about 21% in total taxes.

You can use online tax calculators to confirm my numbers.

Neither scenario is very likely.
"The absolute worst case scenario is if If you are single and making $500k/yr and living in California and take no deductions other than the standard you'd be at about 41% in total taxes including FICA and all Federal and California taxes."
FWIW - we are in NY and that is not the worst case scenario.
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Re: Will I really need 80% replacement during retirement?

Post by Jags4186 »

80%, in general and for most people, leaves you with the same amount of money to spend while retired as when you were working.

Some people will spend 100%+ of what they spent before retiring.
Some people will spend well below 80%.

What’s important is that you run the numbers for yourself.

Most people when they retire increase their spending for the first few years before settling down.
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Re: Will I really need 80% replacement during retirement?

Post by MikeG62 »

I am in the camp of building a bottoms up spending budget based upon what you spend now, adjusted as appropriate for expenses that will decline or go away (commuting as one example) and others that will increase or begin (health care being a big one).

Any reliance on a % of income rule of thumb is a lazy way to go about calculating something that is really, really important and must be known before one decides that are ready financially to retire.
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ROIGuy
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Re: Will I really need 80% replacement during retirement?

Post by ROIGuy »

oldcomputerguy wrote: Mon Oct 26, 2020 7:40 am
Mr.BB wrote: Sun Oct 25, 2020 5:46 pm Track your expenses (in detail) for 1-2 years. It will go a long way in learning about how much you will need in retirement. If you do this, whatever number you come up with and another $3,000-$4,000 a year for surprises.
In fact I did something just about like this in the years leading up to my retirement. I took a look at my monthly and annual expenses, figured out what likely would change after retirement (for example, monthly gas expenses went way down while streaming costs went up), and based my target on that calculation. (In the process I learned some Excel skills. :wink: )

To the OP, there are many people out there that will make general statements about how much retirement savings or income one "has to have" before they can retire. Their generalized statements are invalid simply because they have no idea how much you need to live in your particular situation now, so they cannot possibly know how much you will need to meet your expenses in retirement. Nor do they know how your particular situation will and won't change once you're in retirement.
I think it is important to add the $3,000-$4,000 as a padding to whatever number you come up with for surprises. If you don't use that year you can add it as a bonus for next year, invest it or take a vacation. Plan for the worst, hope for the best.
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Re: Will I really need 80% replacement during retirement?

Post by willthrill81 »

As others have noted, there are no good shortcuts for this. You need to figure out how much you plan on spending in retirement for yourself and not rely on a fatally flawed rule of thumb.

We're saving 50% of our gross income, so we certainly don't need to replace 80% of that income in retirement.
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rhornback
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Re: Will I really need 80% replacement during retirement?

Post by rhornback »

OP here.

Thank you everyone for your feedback. I feel the advice of tracking two years expenses as pointed out by multiple responders is very valuable.

Myself, I have a kid who is a Freshman in college and one who just started working in June. We also live in a house that we will not need (at any rate I do not want) once my kids have moved out.

So I am not in a stable enough environment to estimate expenses yet. I plan to keep working and saving where I can for now... at least until my second finishes college.
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Re: Will I really need 80% replacement during retirement?

Post by daacrusher2001 »

As I approach retirement - likely next year - I have simply used my current spending to model what I'll need. It might be more or less once I get into retirement. We'll see. It depends on several factors.

That number is ~60% of our work income. All investment income has been reinvested fully. Not spending any of it.

I gave up trying to categorize every expense, and be accurate to within a few percent tolerance. Not worth the effort. I just took our net income - net to our checking account every month - and assumed I'll need as much when retired.
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Re: Will I really need 80% replacement during retirement?

Post by LittleMaggieMae »

I kind of hate that 80% replacement number as well. I'm single and always have been. I don't think I've EVER had 80% of my gross salary show up in my paycheck. Even if I didn't take advantage of pretax stuff - after payroll taxes and healthcare (my contribution toward the plan my employer offers) I don't think I'd see 80% of my gross salary.

I currently have 55% of my gross income to cover all of my expenses/savings (aka my yearly budget/spending plan that doesn't include long term savings). If my paycheck stopped tomorrow - I'd have to add in some $$ for health care.
I suppose the cost of Healthcare per year BEFORE I turn 65 and qualify for Medicare MIGHT be t 25% of my current gross income.

It looks like I am chained to my employer for healthcare until I can save up enough to cover the cost.

I guess it depends on what exactly "retirement" means... retiring before 65 or after....
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Re: Will I really need 80% replacement during retirement?

Post by firebirdparts »

What else can they do? They don't know your expenses. Just accept that the right way to do it would be using your expenses, and they don't have that info. there is no "rule of thumb" but I admit people seem to have a natural gift for spending most of their money without really trying. I admit that. But still, a rule of thumb in this case is just dumb. They know it's dumb. They don't have any better way to do it.
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Re: Will I really need 80% replacement during retirement?

Post by randomguy »

Watty wrote: Sun Oct 25, 2020 7:43 pm
rhornback wrote: Sun Oct 25, 2020 5:36 pm "According to AARP, one common rule of thumb is that you'll need 70% to 80% of your pre-retirement income after you retire. So if you made an average of $75,000 per year during your working years, you may only need $52,500 to $60,000 in retirement."
If your income was $75K when working you would also have about 7.65% FICA taxes and maybe 10%+ so when you subtract those out that would almost put you into that income range so it does not sound unreasonable.

Where the percent of income rule of thumb breaks down is that if your income while working was twice as high and you make $150K while working then lot of your retirement expenses will not double. For example your healthcare, food, utilities, etc would not double.
All of these rules of thumb are given so that the people audience or reading the article can figure out where they are. If you ask 100 people what they make last year, most will know. Ask them what they spend, you will get blank looks. Say 80% of income they can do the math and follow along. If you are talking to a room of 20-50 year olds, odds are it is good enough.

Questions about these types of rules of thumb (how much should I spend on a house or car, how much should I save,...) show up constantly. I can't for the life of me figure out why people value them so much. I am not sure if people just can't think or if they really just like deferring choices to some random authority figure.
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Re: Will I really need 80% replacement during retirement?

Post by vineviz »

LittleMaggieMae wrote: Mon Oct 26, 2020 10:26 am I kind of hate that 80% replacement number as well. I'm single and always have been. I don't think I've EVER had 80% of my gross salary show up in my paycheck. Even if I didn't take advantage of pretax stuff - after payroll taxes and healthcare (my contribution toward the plan my employer offers) I don't think I'd see 80% of my gross salary.

I currently have 55% of my gross income to cover all of my expenses/savings (aka my yearly budget/spending plan that doesn't include long term savings). If my paycheck stopped tomorrow - I'd have to add in some $$ for health care.
I suppose the cost of Healthcare per year BEFORE I turn 65 and qualify for Medicare MIGHT be t 25% of my current gross income.

It looks like I am chained to my employer for healthcare until I can save up enough to cover the cost.

I guess it depends on what exactly "retirement" means... retiring before 65 or after....
Chances are you’ll pay taxes in retirement too, right?

I other words, tax is one of the expenses that the 80% rule of thumb is expected to cover.
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HomerJ
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Re: Will I really need 80% replacement during retirement?

Post by HomerJ »

Trader Joe wrote: Sun Oct 25, 2020 8:41 pm Yes, 80% is a good rule of thumb.
It's garbage for most people on this board.

Expenses is the important metric, not income.
Last edited by HomerJ on Mon Oct 26, 2020 11:18 am, edited 1 time in total.
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Re: Will I really need 80% replacement during retirement?

Post by Shallowpockets »

OP - This is your quote, " I plan to keep working and saving where I can for now... at least until my second finishes college."

That is about all you can do. Or most of us. Keep saving as much as you can. What else can you do?
It doesn't matter if you need 60-70-80-100% of your working income to retire. You can only save so much. If the number to retire was 70% of your working income, would you only save to that amount, or stop when you reached that amount? NO, probably not. You would keep saving.
So whether or not a certain number is necessary is subjugated by the facts of your ability to reach it.
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HomerJ
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Re: Will I really need 80% replacement during retirement?

Post by HomerJ »

vineviz wrote: Mon Oct 26, 2020 11:11 am Chances are you’ll pay taxes in retirement too, right?

I other words, tax is one of the expenses that the 80% rule of thumb is expected to cover.
Taxes will be a lot lower for many of us in retirement.

If one makes $140,000 now, and lives on $80,000 (with a mortgage payment), one could possibly retire with a paid off house only needing to pull $60,000 from retirement accounts, and with any money in taxable or bank accounts, one could quite probably game the withdrawals to only pull $40,000 a year, and pay nearly nothing in taxes.

Far less than one was paying making $140,000 for sure.
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