High income earners and retirement budget?.

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me112964
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High income earners and retirement budget?.

Post by me112964 » Sat Jan 23, 2016 9:44 am

Do high income earners (300,000$+) really need 75% of there income for a good retirement? Hear this all the time from financial advisors. Wife and I live on about 130000/yr with mortgage ( which will be gone before retirement), current college tuition for two kids ( also gone by retirement). Plan is to downsize home, retire by 59-60, work part time and travel a lot. Thoughts anyone? I am assuming a good life living on 90-100000$ year.

Theseus
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Re: High income earners and retirement budget?.

Post by Theseus » Sat Jan 23, 2016 10:02 am

I would do consumption based planning. I used ES Planner over 10 years ago to get a good handle on my expenses. Back then it was Excel based software. By now it should be web based and a lot easier to use. ES Planner gave me what will be my expenses each year during the retirement. And then I used FinancialEngines to plan my savings and investments to get to that level.

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Steelersfan
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Re: High income earners and retirement budget?.

Post by Steelersfan » Sat Jan 23, 2016 10:13 am

Sounds perfectly fine to me.

I wasn't that high an earner but did quite well while I was working. My expenses are well less than 75% of my pre-retirement income.

keith6014
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Re: High income earners and retirement budget?.

Post by keith6014 » Sat Jan 23, 2016 10:19 am

300k isn't a lot in high cost of living area such as NJ :annoyed

JohnFiscal
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Re: High income earners and retirement budget?.

Post by JohnFiscal » Sat Jan 23, 2016 10:23 am

My current income is around $240K, and I'm within a couple years of retirement. As I save ~1/3 of my income for retirement that knocks my equivalent income down to $160K. I'm looking at having a retirement "income" of around $70-80K to cover expenses and some nice living (travel, etc)

Rebecca_S
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Re: High income earners and retirement budget?.

Post by Rebecca_S » Sat Jan 23, 2016 10:24 am

For planning purposes when you are far from retirement, it isn't a bad rule of thumb. However, as you get closer to retirement it is better to work off your actual expenses, which may have changed a lot over the years. You might no longer have the expenses of mortgage, income taxes, childcare, child education but have new expenses such as health care.

letsgobobby
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Re: High income earners and retirement budget?.

Post by letsgobobby » Sat Jan 23, 2016 10:26 am

$100k with no mortgage is about 3x what many families spend per year with a mortgage, so I think that sounds fine. We are also aiming for that amount. For high earners social security may supply 40-50% of that. That implies you really only need $1.5 million to retire at full retirement age. More for earlier. Plus health care and taxes.

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avenger
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Re: High income earners and retirement budget?.

Post by avenger » Sat Jan 23, 2016 10:29 am

I live on about 20-25% of my gross income. I plan on using 30x expenses for my early retirement plan.
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dbr
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Re: High income earners and retirement budget?.

Post by dbr » Sat Jan 23, 2016 10:32 am

Any simple rule of thumb is inaccurate compared to actually tabulating what you plan to do. But it is a valid point that far from retirement people don't have a clear picture of what that is or what it will cost. The assumption that people who make a lot of money spend a lot of money and will do so in retirement is as good a guess as any. The more you know the more accurate you can make your assumptions. Closer to retirement and certainly in retirement one can sum up actual spending plus known changes one can anticipate and create a budget that works. There are significant differences in lifestyle once one is retired including moving to a different community, phasing out childraising expenses, adding expenses associated with aging, change in medical care needs and how those are supported, and so on.

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Re: High income earners and retirement budget?.

Post by Rodc » Sat Jan 23, 2016 10:48 am

dbr wrote:Any simple rule of thumb is inaccurate compared to actually tabulating what you plan to do. But it is a valid point that far from retirement people don't have a clear picture of what that is or what it will cost. The assumption that people who make a lot of money spend a lot of money and will do so in retirement is as good a guess as any. The more you know the more accurate you can make your assumptions. Closer to retirement and certainly in retirement one can sum up actual spending plus known changes one can anticipate and create a budget that works. There are significant differences in lifestyle once one is retired including moving to a different community, phasing out childraising expenses, adding expenses associated with aging, change in medical care needs and how those are supported, and so on.
This.

I can take what I now take home, subtract out college, saving for retirement and such and get a handle on what I am spending now sans job, sans kids, etc. to estimate what fraction is going towards wife and I. That is a top down approach.

I can write down all the various types of spending I imagine having in retirement and add them up to get a bottoms up estimate.

Good to split out as really required vs discretionary.

Then estimate tax hit to work back to income needed.

I estimate something like 60% of pre-retirement income will be needed to maintain current lifestyle, plus some extra for a little more travel.
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.

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Re: High income earners and retirement budget?.

Post by KlangFool » Sat Jan 23, 2016 11:00 am

me112964 wrote:Do high income earners (300,000$+) really need 75% of there income for a good retirement? Hear this all the time from financial advisors. Wife and I live on about 130000/yr with mortgage ( which will be gone before retirement), current college tuition for two kids ( also gone by retirement). Plan is to downsize home, retire by 59-60, work part time and travel a lot. Thoughts anyone? I am assuming a good life living on 90-100000$ year.
me112964,

You know you ACTUAL ANNUAL EXPENSE now. And, you know your annual expense after the kids gone and mortgage paid. So, you know how much that you need to spend at retirement. You do not need to use the imprecise and wrong number like 75% of income.

KlangFool

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TheTimeLord
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Re: High income earners and retirement budget?.

Post by TheTimeLord » Sat Jan 23, 2016 11:20 am

keith6014 wrote:300k isn't a lot in high cost of living area such as NJ :annoyed
I am thinking it still is when taken in context, 4x the state's median household income.

http://www.nj.com/news/index.ssf/2013/1 ... ensus.html

"The median household income in New Jersey is the second highest in the country, according to new Census numbers released on Tuesday, Dec. 17.

New Jersey ranks number two with a median household income of $71,637, according to the latest 2008-2012 American Community Survey estimate.

Only Maryland ranks higher, with a median income of $72,999 with Alaska coming in third with $69,917.

Among the counties, Hunterdon County earns the highest median household income with $105,880. Somerset comes in second with $98,571 and Morris third with $97,979.

All three of the highest earning counties in New Jersey usually rank among the highest in the country.

The county with the lowest median household income is Cumberland County with $51,530."
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SQRT
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Re: High income earners and retirement budget?.

Post by SQRT » Sat Jan 23, 2016 12:03 pm

Not sure why you are asking us? You know the answer? Really depends on how much travel and other discretionary expense you want to incur. Key is knowing your current expenses(you do) and adjusting for retirement (you have).

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MikeWillRetire
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Re: High income earners and retirement budget?.

Post by MikeWillRetire » Sat Jan 23, 2016 12:26 pm

There are people who live paycheck to paycheck, they don't own a house, and their adult children are dependent on them. They need 75%.

wolf359
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Re: High income earners and retirement budget?.

Post by wolf359 » Sat Jan 23, 2016 12:53 pm

me112964 wrote:Do high income earners (300,000$+) really need 75% of there income for a good retirement? Hear this all the time from financial advisors.
Nope. The better advice is to calculate your expenses in retirement, and plan against that number. The 75% of income advice is because most people can tell you how much they make, but most can't tell you what they spend each year (let alone run a projection for anticipated expenses in retirement.) A recent Gallop poll revealed that 2/3 of American households have no budget. No budget means the household doesn't know how much they spend.

It may also be so that you will come up with a big number that will scare you, making you more likely to hire a financial advisor.

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HomerJ
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Re: High income earners and retirement budget?.

Post by HomerJ » Sat Jan 23, 2016 12:57 pm

me112964 wrote:Do high income earners (300,000$+) really need 75% of there income for a good retirement? Hear this all the time from financial advisors. Wife and I live on about 130000/yr with mortgage ( which will be gone before retirement), current college tuition for two kids ( also gone by retirement). Plan is to downsize home, retire by 59-60, work part time and travel a lot. Thoughts anyone? I am assuming a good life living on 90-100000$ year.
All that matters is your expenses. Income means nothing at all. Do not do any calculations based on income.

me112964
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Re: High income earners and retirement budget?.

Post by me112964 » Sat Jan 23, 2016 1:42 pm

Thanks all. I agree that the 75% of income is a bit of a farce. I think that our expenses now are a better estimate.

Rodc
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Re: High income earners and retirement budget?.

Post by Rodc » Sat Jan 23, 2016 1:45 pm

No budget means the household doesn't know how much they spend.
Not true at all.

Many of these folks know exactly how much they spend.

All of it. :)
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.

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Re: High income earners and retirement budget?.

Post by jackholloway » Sat Jan 23, 2016 1:55 pm

TheTimeLord wrote:
keith6014 wrote:300k isn't a lot in high cost of living area such as NJ :annoyed
I am thinking it still is when taken in context, 4x the state's median household income.

http://www.nj.com/news/index.ssf/2013/1 ... ensus.html

"The median household income in New Jersey is the second highest in the country, according to new Census numbers released on Tuesday, Dec. 17.

New Jersey ranks number two with a median household income of $71,637, according to the latest 2008-2012 American Community Survey estimate.

Only Maryland ranks higher, with a median income of $72,999 with Alaska coming in third with $69,917.

Among the counties, Hunterdon County earns the highest median household income with $105,880. Somerset comes in second with $98,571 and Morris third with $97,979.

All three of the highest earning counties in New Jersey usually rank among the highest in the country.

The county with the lowest median household income is Cumberland County with $51,530."
I was about to post the same. The 2014 numbers look similar, just shy of 72k median for the state. If you think $300k is not much, try living on a quarter that.

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GerryL
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Re: High income earners and retirement budget?.

Post by GerryL » Sat Jan 23, 2016 2:30 pm

me112964 wrote:Do high income earners (300,000$+) really need 75% of there income for a good retirement? Hear this all the time from financial advisors.
The recommendations about what percentage of your working income you will need in retirement really irk me. Income is irrelevant. If you're earning $90k and spending $95k, even 100% of your income is not going to be enough for a good retirement. Apparently financial planners spend every penny they make, or else they would understand that it's expenses that count, not income.

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ram
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Re: High income earners and retirement budget?.

Post by ram » Sat Jan 23, 2016 7:41 pm

No.
Over the last decade our expenses can be categorized as -
1) Mortgage - now gone.
2) College education - now gone as 529 plans are adequately funded.
3) Retirement savings- not applicable once retired.
4) Taxes- Will be lower in retirement.
5) Other.

Only the 4) and 5) are relevant in retirement and we are planning that so that we have the taxes and about 125% of the "other".
It will be much less than 50% of current income.
Ram

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TheTimeLord
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Re: High income earners and retirement budget?.

Post by TheTimeLord » Sat Jan 23, 2016 8:32 pm

ram wrote:No.
Over the last decade our expenses can be categorized as -
1) Mortgage - now gone.
2) College education - now gone as 529 plans are adequately funded.
3) Retirement savings- not applicable once retired.
4) Taxes- Will be lower in retirement.
5) Other.

Only the 4) and 5) are relevant in retirement and we are planning that so that we have the taxes and about 125% of the "other".
It will be much less than 50% of current income.
Agree, between savings and taxes we live off of about 40-45% of our gross income and that might drop another 5% if we weren't working.
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ks289
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Re: High income earners and retirement budget?.

Post by ks289 » Sat Jan 23, 2016 8:40 pm

Expenses are currently 35% of income but will drop in retirement with mortgage paid off at that point. Still aiming to save for 25 x the larger number to provide a cushion (?inheritance) and to account for taxes.

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Re: High income earners and retirement budget?.

Post by Artsdoctor » Sat Jan 23, 2016 9:23 pm

112964,

It sounds as if you're relatively far away from "retirement" although I could be wrong.

You can get a rough idea of what your expenses might be when you're projecting years into the future by taking your income and subtracting out savings, mortgage, child education, etc. But this is really a very rough estimate. As noted in the above thread, you'll eventually benefit from keeping track of expenses in order to know more fully where your money is going.

I cut back on work in order to "try it out." The thing that struck me is how quickly you fill up that time you now have. You mentioned that you'd like to travel, and that's what happened with me. And while you will have more time to check out travel deals, you'll inevitably spend more time (and money) on travel than when you worked. Likewise, you may well find yourself having longer (and more expensive) lunches with friends than when you're working full-time. It'll take some adjusting and only you will know how you'll want to spend that time.

betterfinances
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Re: High income earners and retirement budget?.

Post by betterfinances » Sat Jan 23, 2016 9:30 pm

me112964 wrote:Do high income earners (300,000$+) really need 75% of there income for a good retirement? Hear this all the time from financial advisors. Wife and I live on about 130000/yr with mortgage ( which will be gone before retirement), current college tuition for two kids ( also gone by retirement). Plan is to downsize home, retire by 59-60, work part time and travel a lot. Thoughts anyone? I am assuming a good life living on 90-100000$ year.
I've thought a lot about this as far as my own retirement planning goes. Right now, the 4 major expenses that I have are: taxes, mortgage payment, daycare charges, and retirement savings. With the exception of taxes, none of those will be applicable during retirement. Unless I find new expensive hobbies to fill my time, I don't see how I will spend anywhere close to the amount that I am "spending" (savings + expenditures) today without those big expenses.

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Re: High income earners and retirement budget?.

Post by Traveler » Sat Jan 23, 2016 10:31 pm

Any time I read an article about retirement that starts talking about using a percent of pre-retirement income to calculate how much I need to save for retirement, I stop reading and disregard the article. It's all about expenses.

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Re: High income earners and retirement budget?.

Post by randomguy » Sat Jan 23, 2016 11:45 pm

me112964 wrote:Do high income earners (300,000$+) really need 75% of there income for a good retirement? Hear this all the time from financial advisors. Wife and I live on about 130000/yr with mortgage ( which will be gone before retirement), current college tuition for two kids ( also gone by retirement). Plan is to downsize home, retire by 59-60, work part time and travel a lot. Thoughts anyone? I am assuming a good life living on 90-100000$ year.

Most people don't know their expense so the income rule gives a decent estimate. Lots of people live the good life on 40k/yr. Others need 100k. The key is knowing yourself. Personally it always seems high to me since I will go from paying about 37% in taxes to 18%, and will go from saving ~30-40% of my gross income to 0. I figure if I get ~20-30% of my current income, I will be fine. If I was making 100k and saving 15% and paying 20% in taxes, 75% would be pretty close.

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Watty
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Re: High income earners and retirement budget?.

Post by Watty » Sun Jan 24, 2016 12:12 am

You also need to consider your income at different ages.

I have seen relatives naturally slow down by their mid 70's and their spending dropped a lot since they didn't want to travel or even shop much.

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sdsailing
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Re: High income earners and retirement budget?.

Post by sdsailing » Sun Jan 24, 2016 1:18 am

Of course not, especially if you do not need it when working.

That is the power of modest living.

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Artsdoctor
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Re: High income earners and retirement budget?.

Post by Artsdoctor » Sun Jan 24, 2016 11:25 am

Watty wrote:You also need to consider your income at different ages.

I have seen relatives naturally slow down by their mid 70's and their spending dropped a lot since they didn't want to travel or even shop much.
This really all comes down to health. We travel with a small group internationally and our friends in their late 70's can wear us out. They travel even more than we do, and they buy art all along the way. They've mentioned that their expenses have actually increased with time, although they have the means to support that increase.

The thing that is really not publicized all that much is what happens in late retirement regarding expenses. Again, it's all about health, but you might find this blog from Vanguard interesting. This has been our experience with parents and in-laws:

http://vanguardblog.com/2013/06/19/the- ... etirement/

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Re: High income earners and retirement budget?.

Post by jhfenton » Sun Jan 24, 2016 11:57 am

I don't think it's realistic to come up with a retirement budget 20+ years from retirement. I expect my retirement budget will depend greatly on how much we have. The more we have, the more travelling we will do. The more we have, the more likely we are to have separate summer and winter residences. The more we have, the more we will spend. We could undoubtedly live reasonably well just on our social security checks.

So for the moment, at age 45 with two kids in 6th and 7th grades, I just model our retirement based on 75% of our current gross income, ignoring social security. Once you consider taxes and current savings (30%+ of gross income), I'm planning for far more than we currently spend. And our current mortgage will be gone long before retirement.

It's a different story when you're actually at the point of considering (early) retirement. At that point, it makes sense to do a budget and model your hypothetical retirement. But when you're still in the middle of the accumulation phase, any retirement budget you come up with is going to be a fantasy. At that point, rules of thumb based on a percentage of income are reasonable guidelines for most folks. (If your income is $300,000 then you should just accept that no rules of thumb apply to you.)

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Re: High income earners and retirement budget?.

Post by JGoneRiding » Sun Jan 24, 2016 12:14 pm

Well I "only" make about 100k. And I have 30 years still to go. But I did a calculation on my budget I "live" off of 35% of what I make meaning the rest goes to: Taxes, savings/retirement, mortgage, debt repayment. My retirement plan has me replacing to about 100k not adjusting for inflation which I believe will be equivalent to about 60-70k today, so maybe a little similar in percentages?

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patriciamgr2
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Re: High income earners and retirement budget?.

Post by patriciamgr2 » Sun Jan 24, 2016 1:46 pm

Especially for people who are considering Early Retirement, I think it's useful for both spouses to go through a planning exercise. What you project won't be accurate, of course, because you need to be close to retirement to plan accurately. But doing the projection is important to identify drivers of spending. Even decades away from retirement, you can agree on how you will live as a retiree vs. your current spending. IMO, salary is NOT a useful predictor of spending. Your desired lifestyle is the best guide.

Eccentric as it sounds, I advocate people "practicing" retirement when they get within a few years--go take your vacation in a Bnb rental where you plan to live, rent the vehicle (s) you plan to drive, make notes on what you actually plan to do every day & what you would hope to do over the course of the year in retirement.

I retired earlier than my cohorts at a mega-corp & watched some of the retirement planning my former co-workers did. One spouse would pronounce that they were ready to retire based on his/her calculations; while the other spouse thought they were keeping the big house up north AND buying a condo/had planned multiple trips/& felt that retirement included avoiding cooking drudgery. Pre-ACA, people were routinely horrified by the individual health insurance market's high prices, assuming they could actually get insurance. If you fell into a high-risk pool, the only realistic choice was to go back to work to get benefits. Also, people often fail to realize that, depending on the location (IRA vs. Roth vs. taxable) of their assets and what property taxes are on the retirement home, they may have big tax bills in retirement as well.

Health care costs are widely underestimated IMO. Few people focus on how they will pay for long-term care. Personally, I don't think it's safe to assume that spending will decline over time after one retires. The increases in health care costs & the issues with LTC insurance make that questionable IMO and I am blessed with good health & no family history of Alzheimer's, etc. Some families have a history of cognitive issues; if that's true for you, I urge you to think about long-term care before you pull the plug on retirement.

Good Luck

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Re: High income earners and retirement budget?.

Post by The Wizard » Sun Jan 24, 2016 3:48 pm

Budgeting and expense itemization tend to be conservative and forget to allow for "one time" repair and replacement expenses.

If your gross income is $100k and you put $20k into your 401k and IRA this year, then your expenses are $80k.
Now if you put an additional $5k into savings or taxable investments and REALLY plan to keep that for retirement, then your expenses drop to $75k.

If you plan to use that $5k toward a new car or a trip to Oz, then your expenses stay at $80k.

Further adjustments to expenses based on changes from working to retirement could cause that $80k number to go up or down...
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TomatoTomahto
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Re: High income earners and retirement budget?.

Post by TomatoTomahto » Sun Jan 24, 2016 4:28 pm

+1 for ESPlanner and consumption smoothing.

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Re: High income earners and retirement budget?.

Post by Miguelito » Mon Jan 25, 2016 5:10 pm

I've posted about this in the past. We have a good income and fully expect our home to be paid well before retirement. I am confident we would be happy retiring with $75k/year. My high end retirement budget is in the $125-150k range (lots of vacations, continue to live in our current home, nice cars, gifts, etc). To your point, the high end is less then half of what we make now. So we can comfortably retire on 1/4 of current gross income and be fine. And if we stick to $75k, SS from both of us (assuming we continue to work long enough) should cover about half of that since we both max out and we are still young (late 30's).

I'm pretty sure we could live a very nice retired life while staying inside the 15% tax bracket.

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randomguy
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Re: High income earners and retirement budget?.

Post by randomguy » Mon Jan 25, 2016 6:51 pm

The Wizard wrote:Budgeting and expense itemization tend to be conservative and forget to allow for "one time" repair and replacement expenses.

If your gross income is $100k and you put $20k into your 401k and IRA this year, then your expenses are $80k.
Now if you put an additional $5k into savings or taxable investments and REALLY plan to keep that for retirement, then your expenses drop to $75k.

If you plan to use that $5k toward a new car or a trip to Oz, then your expenses stay at $80k.

Further adjustments to expenses based on changes from working to retirement could cause that $80k number to go up or down...
While I agree with the general point, the last sentence is something though that happens to almost everyone though as the tax situation changes a lot. Take the couple with 100k of income, and who put 20k into an IRA. Where their expenses 80k or 65k? You can make good arguements for either. While working that couple paid about 7k in payroll taxes and 8k in federal income taxes for a tax home spending amount of 65k. Lets say they retire and get 31k of ss, 15k of IRA, and 20k of LTGC/QDIvs (66k of total income). They pay 593 of federal tax and have about same after tax spending. So while their current expenses are 80k, they only need 66k in retirement for the same lifestyle. There are tons of moving parts (senior tax brackets, medicare copays,....) to think about.

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Re: High income earners and retirement budget?.

Post by Sconie » Mon Jan 25, 2016 7:02 pm

Well, before we retired in mid-2012, wife and I had an gross annual income of about $350K. Since retirement, our gross income has averaged about $210K annually, an approximate 60% "replacement rate." All I can say is, life couldn't be better!
I know that you think you understand what you thought I said, but I don't think you realize that what I said is necessarily what I meant......

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