What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

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goodenyou
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What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by goodenyou »

I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
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Shamb3
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by Shamb3 »

It depends on spending. I am investing heavily to get a earlier retirement though.
Mine comes out to
60% for years I am paying a mortgage.
40% for years after the mortgage is paid off.

I calculate my spending as
Income
minus pre tax investing
minus taxes
minus post tax investing
minus mortgage payments
plus bonus
plus some extra fun money


Basically if the government isn't getting it and i am not investing it, I must be spending it.
The exception being the mortgage.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by kmurp »

A little less than 50%. But that’s by default because I won’t be able to afford spend any more than that. It may be less, like 40%.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by stan1 »

I don't think this can be generalized that way so you need to look at your situation. What you no longer need to pay for in retirement is withholding: FICA, Medicare, etc. You also don't make contributions to a 401K. You don't need to save in a taxable account. Your marginal federal and state tax rates may drop. Your health insurance costs may go down, stay about the same, or increase (maybe by a lot).

For us other expenses don't change significantly (travel, groceries, dining out, cars, gifts, gasoline, home maintenance). If you make lifestyle changes as a result of retirement that can move expenses up or down.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by TierArtz »

I've been focusing on how much I'll spend in retirement using 5 year spending history and subtracting what I know I will not be spending in most of my retirement (mortgage, 529 savings, and work-related costs). My non-charitable spending will be roughly 75% of what it is now, and roughly 55% of my current take-home pay (job and pension).
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by bertilak »

I no longer needed to "spend" money on FICA, 401(k), IRA. That made a big difference in cash flow. Shortly after retirement I paid off my mortgage, making another big cash flow difference. I used to spend about $40/month on commuting tolls but I cut that down a couple of years before retirement by working from home. That all added up to a lot of pre-retirement income I didn't need to spend, leaving me with an excess of income. It boiled down to the equivalent of a big raise.

Other expenses didn't change much at all.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by KlangFool »

goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
goodenyou,

Any "advisers" that use the income for retirement planning are not worth listening to. It should be based on expense.

This can be proven by some simple examples.

A) If a person saves 33% of his gross income, pay 33% in taxes, and spend 33%. How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 33%.

B) If a person saves 15% of his gross income, pay 35% in taxes and spend 50%.
How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 50%.

And so on...

KlangFool
Sam1
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by Sam1 »

I calculated that 80 percent of my takehome pay is spent on my mortgage, savings, childcare, and 529s.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by EnjoyIt »

KlangFool wrote: Sun Jan 27, 2019 6:38 pm
goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
goodenyou,

Any "advisers" that use the income for retirement planning are not worth listening to. It should be based on expense.

This can be proven by some simple examples.

A) If a person saves 33% of his gross income, pay 33% in taxes, and spend 33%. How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 33%.

B) If a person saves 15% of his gross income, pay 35% in taxes and spend 50%.
How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 50%.

And so on...

KlangFool
Yup, the question isn't how much you make, but how much you spend. Save enough so that you can spend as much as you want. Someone who wants to spend $100k/yr and makes $500k/yr will have a different percentage compared to someone who makes $200k/yr and also looking to spend $100k/yr.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by Sam1 »

goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?

This doesn’t make any sense. What if someone has five kids and is saving for college for all of them and another person has zero kids and spends it all on booze and travel?
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by Mike Scott »

Percentage of income may be the wrong measure. However, most people know their income and may or may not bother to figure their actual expenses. Income minus taxes and work related costs etc makes an immediate conversation starting point that is relevant to almost everyone. Maybe they can move on to using a better measurement someday but it is a better starting point than nothing. 70-80% of income is probably not a bad guess for many people.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by goodenyou »

KlangFool wrote: Sun Jan 27, 2019 6:38 pm
goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
goodenyou,

Any "advisers" that use the income for retirement planning are not worth listening to. It should be based on expense.

This can be proven by some simple examples.

A) If a person saves 33% of his gross income, pay 33% in taxes, and spend 33%. How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 33%.

B) If a person saves 15% of his gross income, pay 35% in taxes and spend 50%.
How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 50%.

And so on...

KlangFool
Klang:

Are you projecting that your expenses will stay the same, go down or up? Mine will (should) go down significantly (I think). I am asking those who may have some wisdom of unexpected costs or unexpected savings.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by KlangFool »

goodenyou wrote: Sun Jan 27, 2019 6:52 pm
KlangFool wrote: Sun Jan 27, 2019 6:38 pm
goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
goodenyou,

Any "advisers" that use the income for retirement planning are not worth listening to. It should be based on expense.

This can be proven by some simple examples.

A) If a person saves 33% of his gross income, pay 33% in taxes, and spend 33%. How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 33%.

B) If a person saves 15% of his gross income, pay 35% in taxes and spend 50%.
How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 50%.

And so on...

KlangFool
Klang:

Are you projecting that your expenses will stay the same, go down or up? Mine will (should) go down significantly (I think). I am asking those who may have some wisdom of unexpected costs or unexpected savings.
goodenyou,

I am not planning for retirement. I am planning for FI. My annual expense of 60K will stay the same because I choose to keep it the same. The only difference might be if I pay off my mortgage, I may reduce my expense by 15K per year.

<<Are you projecting that your expenses will stay the same,>>

This is actually not a projection. I was unemployed for more than 1 year a few years ago. So, I have an actual number when I was unemployed. It stayed the same.

<<I am asking those who may have some wisdom of unexpected costs or unexpected savings.>>

I kept my annual expense about the same for the last 10+ years. So, I have no idea what do you mean unexpected cost. I am "Pay Yourself First" person. I only have 60K to spend every year. I cannot spend the money that I do not have.

KlangFool
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by 22twain »

We're both retired: 2 years ago for me and 7 years ago for DW, although she still works part time. Last year, our total expenses were about 32% of our gross earnings during the last year we both worked normally. The only significant changes in expenses were that income taxes last year were much lower than when we were both working, and medical expenses were higher because DW went on Medicare in the meantime, whereas I was still on our inexpensive employer health plan as an "early retirement" benefit. We paid off our house a few years before DW retired.

This year, DW starts Social Security and RMDs, so taxes will increase. Also, I've just started Medicare, so I now have to pay the premiums. Therefore this year, I project that our total expenses will be about 42% of our final gross earnings.

After I finally start SS and RMDs, expenses will probably go up to about 55% of our final gross earnings.

This does not include possible major additional medical expenses, or increased travel, new cars, etc.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by ByThePond »

I am projecting that my expenses will be about the same and that my gross income in retirement will also be just about the same, then rising at age 70 . That looks like an immediate 30% or better increase in net, spendable income, due to the loss of payroll taxes, commuting, and retirement savings.
I don't think the "80%" idea is too widely applicable unless you are looking solely at gross income. And even then, the % varies widely with circumstances. An actual expense projection seems more useful.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by radiowave »

I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs?
My post is probably not actionable since I'm still just shy of retirement in a couple years but:

- anticipated expenses in retirement, some will be lower than current like commuting and paying for lunch, but some higher like health care so our current projections are expenses after retirment will be equivalent to preretirement (basically a wash)

- by slightly delaying SS, and with anticipated small pension, total retirement income will meet or slightly exceed basic expenses, this assumes plan to pay off mortgage at or just before retirement is successful (and we are on track).

- So I guess the answer to "What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?" for us is 0%? Maybe I misunderstand?
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by ralph124cf »

I have been retired five years, and our spending is approximately 160% of our preretirement spending. More time to do fun things.

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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by Phineas J. Whoopee »

I am projecting somewhat more than 100% of my pre-retirement expenses, because of no longer having employer-sponsored health insurance and the inevitable increase of healthcare needs with age, but my expenses are less than my pre-retirement income. That's how I've been able to accumulate enough.

I believe the standard advice is predicated on everybody always spending every dollar as soon as it comes into their possession.

Some people feel better when spending more on a more lavish lifestyle. I feel better spending more on financial assets so I don't have to worry so much about my financial future. Maybe my results will be so good I can reasonably increase spending, but I'm unwilling to make that assumption at such an early stage. I'm prepared for a rough road. May all our roads end up being smooth.

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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by RadAudit »

goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
Back when I was planning, I targeted 100% of pre-retirement income and a 3% / yr. boost due to inflation. So far in retirement, we're doing OK. Right on planned expenditures. Of course, I consider travel and gifts needs.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by 2015 »

goodenyou wrote: Sun Jan 27, 2019 6:52 pm
KlangFool wrote: Sun Jan 27, 2019 6:38 pm
goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
goodenyou,

Any "advisers" that use the income for retirement planning are not worth listening to. It should be based on expense.
...
KlangFool
Klang:

Are you projecting that your expenses will stay the same, go down or up? Mine will (should) go down significantly (I think). I am asking those who may have some wisdom of unexpected costs or unexpected savings.
I never paid attention to % of pre-retirement income nonsense. I agree with KlangFool and go even further as I think almost everything that's written by the financial media is not worth listening to.

I simply tracked my expenses over the years pre-retirement, added an annual "replacements budget" line item to replace everything from furniture to appliances to clothing to house remodels to car replacements. In crafting the overall replacements budget, I borrowed loosely from the strategy condominium homeowner associations use in projecting life of items.

I also engaged in a massive deep and shallow risk assessment of my life and procured sufficient insurance of all kinds, have an emergency disaster plan such that I could take just 5 items from my home and start my life over anywhere, and ensured I have sufficient padding in the event of something like complete loss from house fire, etc.

Everything is going much much better than I could ever have planned, but I attribute that to a veritable crucifixion of work that invited good luck in. I am keenly aware however, that no amount of hard work is a guarantee one won't meet with bad luck. I just agree with Annie Bot (Thinking in Bets book ) that the best way to increase chances of good luck is to increase the effectiveness of one's decision making. You won't find anything about that in the "wealth of information" students of investing incessantly study in the financial media because said media makes no money off of people who get smarter in their decision making
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by GuyInFL »

Shamb3 wrote: Sun Jan 27, 2019 6:27 pm I calculate my spending as
Income
minus pre tax investing
minus taxes
minus post tax investing
minus mortgage payments
plus bonus
plus some extra fun money


Basically if the government isn't getting it and i am not investing it, I must be spending it.
The exception being the mortgage.
+1
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by dknightd »

goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
I expect my living expenses will be about the same when I retire. Maybe a little bit more since I'll have more free time.
But I won't have to pay SS or medicare tax.
And I won't be saving for retirement.
I suggest you use what you are earning now. Deduct SS and medicare taxes. Deduct what you are saving for retirement. Add in medical as needed. For me that comes out as about 70%. You might come up with a different number. Income is only part of the puzzle. A large portion of my current income goes to SS and retirement savings. Those will go away once I retire . . .
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by Watty »

What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?
Using percentages does not make much sense. Someone that makes $60K a year might need a high percentage of that in retirement. Someone that makes $200K a year might only need a small percentage of their income.

Social security will also replace a higher percentage of the lower earners income.

Defining "need" is also complicated. I could cut my retirement spending but 10 to 20 percent and still have a comfortable modest lifestyle so my real need is less than my budget.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by AlohaJoe »

Sam1 wrote: Sun Jan 27, 2019 6:44 pm
goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?

This doesn’t make any sense. What if someone has five kids and is saving for college for all of them and another person has zero kids and spends it all on booze and travel?
It makes perfect sense -- based on actual research from the Consumer Expenditure Survey what average replacement rates are like and the reality that advisors (and journalists and pension plan advisors and bloggers and....) have to deal with clients that are unable or unwilling to track expenses and make guesses about how those numbers will change over the course of several decades. (30 years ago would have been able to predict that you need to budget for smart phones and Netflix and Uber and meditation retreats and rheumatoid arthritis medication?)

I've never heard of an actual, real advisor telling an actual real, client not to look at actual costs and instead rely on a rule of thumb. That only exists in the fevered imaginations of Bogleheads. As if pretending you can accurately predict your expenses a decade or two in advance is any less nonsensical....

Both approaches are problematic but we don't live in a world with perfect answers. The reality is that virtually all retirees make do with whatever they have when they find themselves retired.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by MnD »

It took about 60% of our pre-retirement income to provide the same financial lifestyle in retirement.
This covers both wants and needs.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by Phineas J. Whoopee »

AlohaJoe wrote: Sun Jan 27, 2019 8:33 pm ...
I've never heard of an actual, real advisor telling an actual real, client not to look at actual costs and instead rely on a rule of thumb. That only exists in the fevered imaginations of Bogleheads. As if pretending you can accurately predict your expenses a decade or two in advance is any less nonsensical....
...
Of course you haven't, and of course it isn't a fevered imagining. Thank you for projecting that on us. Advisers usually agree with their clients victims not to discuss individual particulars with others.

It very much is standard advice and conventional wisdom. How many advisers insurance salespeople do you expect to depart from it?

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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by scrabbler1 »

I never understood the "%-of-income" benchmark. Twice in my career, I voluntarily reduced my income to work part-time. The first time, I took a 40% cut in pay. The second time, I took another cut in pay so I was now earning about 30% of my original, full-time salary (which never exceeded $80k). So, when I hear "%-of-income?" my response is, "of WHAT income?"

By the time I retired 10 years ago, my expenses were about 83% of my last, low part-time income. As a percent of my theoretical full-time income, it would have been about 25%.

Expenses are what matters, not income.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by radiowave »

scrabbler1 wrote: Sun Jan 27, 2019 9:54 pm I never understood the "%-of-income" benchmark. Twice in my career, I voluntarily reduced my income to work part-time. The first time, I took a 40% cut in pay. The second time, I took another cut in pay so I was now earning about 30% of my original, full-time salary (which never exceeded $80k). So, when I hear "%-of-income?" my response is, "of WHAT income?"

By the time I retired 10 years ago, my expenses were about 83% of my last, low part-time income. As a percent of my theoretical full-time income, it would have been about 25%.

Expenses are what matters, not income.
+1
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by J295 »

We tracked expenses, and when working the substantial majority fell into three categories .... taxes, insurance, charities. These expenses are substantially different now in retirement (taxes and insurance in particular reduced dramatically). Percentage of income pre-retirement and needs post retirement could easily be determined, but it would have been a meaningless exercise in our case. Much more pertinent for us was the projected dollar amount of expenses.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by TheNightsToCome »

goodenyou wrote: Sun Jan 27, 2019 6:52 pm
KlangFool wrote: Sun Jan 27, 2019 6:38 pm
goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
goodenyou,

Any "advisers" that use the income for retirement planning are not worth listening to. It should be based on expense.

This can be proven by some simple examples.

A) If a person saves 33% of his gross income, pay 33% in taxes, and spend 33%. How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 33%.

B) If a person saves 15% of his gross income, pay 35% in taxes and spend 50%.
How much does the person need in retirement? Assuming that the expense stays the same, the answer would be 50%.

And so on...

KlangFool
Klang:

Are you projecting that your expenses will stay the same, go down or up? Mine will (should) go down significantly (I think). I am asking those who may have some wisdom of unexpected costs or unexpected savings.
I've been tracking our actual expenses for > 4 years.

I subtract CME, professional fees/dues, and gifts to staff.

I estimate rare expenses such as roof replacement, new cars, etc. and add a yearly amortized expense for these. Because we bought a car a couple of years ago I subtract that expense from the record (after adding an amortized expense for cars).

I then take the average. That's my estimate for retirement expenses before accounting for the change in healthcare costs. I don't know what that will be but I assume it may be a large increase.

I'd like to have 33 times a number significantly larger than this projection before I retire. It may not work out that way, but that's the current plan.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by delamer »

There is no substitute for tracking your actual expenses pre-retirement and then revising those based on expected changes in retirement.

Expenses include short term (monthly/annual), long-term (car replacement, roof replacement, etc.), and income taxes.

Many retirees will end up with a significant expense for long-term care, medical costs, or helping a family member financially. All you can do is get good insurance (for the first two) and keep a financial cushion.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by goodenyou »

radiowave wrote: Sun Jan 27, 2019 9:57 pm
scrabbler1 wrote: Sun Jan 27, 2019 9:54 pm I never understood the "%-of-income" benchmark. Twice in my career, I voluntarily reduced my income to work part-time. The first time, I took a 40% cut in pay. The second time, I took another cut in pay so I was now earning about 30% of my original, full-time salary (which never exceeded $80k). So, when I hear "%-of-income?" my response is, "of WHAT income?"

By the time I retired 10 years ago, my expenses were about 83% of my last, low part-time income. As a percent of my theoretical full-time income, it would have been about 25%.

Expenses are what matters, not income.
+1
If I asked "what percentage of your yearly pre retirement income are your yearly retirement expenses?", could you answer that? Better yet, the ratio of preretirement income/expenses and retirement income/expenses. Hmmm. Maybe I should change the title.
Last edited by goodenyou on Sun Jan 27, 2019 10:23 pm, edited 1 time in total.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by MikeWillRetire »

I am a couple of years away from retiring, and I am planning on 60% of my pre-retirement income. Much of my pre-retirement income was spent on raising children, so retiring on 60% will allow me to live quite well. Can't wait!
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RickBoglehead
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by RickBoglehead »

This. Anyone recommending a flat percentage without knowing a specific situation is a poor advisor. You have to track expenses and forecast the future.
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AllieTB1323
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by AllieTB1323 »

delamer wrote: Sun Jan 27, 2019 10:16 pm There is no substitute for tracking your actual expenses pre-retirement and then revising those based on expected changes in retirement.

Expenses include short term (monthly/annual), long-term (car replacement, roof replacement, etc.), and income taxes.

Many retirees will end up with a significant expense for long-term care, medical costs, or helping a family member financially. All you can do is get good insurance (for the first two) and keep a financial cushion.
Well said, your third point is the unknown which keeps our cash cushion high. As owners of a small business we had a setback which the family helped us out of so we feel a responsibility it pay it forward.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by seed4great »

delamer wrote: Sun Jan 27, 2019 10:16 pm Many retirees will end up with a significant expense for long-term care, medical costs, or helping a family member financially. All you can do is get good insurance (for the first two) and keep a financial cushion.
This is true. Though the question is: how much money suppose to keep financial cushion? 1 year of actual annual expenses? 2 years? 10 years? That is very difficult to predict, given that health care cost or amount to help family are unknown at this time.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (retirement planning).
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by delamer »

seed4great wrote: Sun Jan 27, 2019 10:28 pm
delamer wrote: Sun Jan 27, 2019 10:16 pm Many retirees will end up with a significant expense for long-term care, medical costs, or helping a family member financially. All you can do is get good insurance (for the first two) and keep a financial cushion.
This is true. Though the question is: how much money suppose to keep financial cushion? 1 year of actual annual expenses? 2 years? 10 years? That is very difficult to predict, given that health care cost or amount to help family are unknown at this time.
The simple — although not easy — solution is to be able to cover your basic expenses with your annuitized income, meaning Social Security, pensions, or purchased annuities. Then your nest egg is available for emergencies or other extraordinary expenses.

As I said, simple but not easy to do.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by CurlyDave »

delamer wrote: Sun Jan 27, 2019 10:16 pm ...Many retirees will end up with a significant expense for long-term care, medical costs, or helping a family member financially. All you can do is get good insurance (for the first two) and keep a financial cushion.
There is an alternate way to handle some of the risks you describe.

We bought land in a lower COL area than we lived in and built a retirement house specifically designed to handle these risks. The house has two floors with one being devoted to our living area, MBR, guest room, LR, DR, and Kitchen. The other floor has 2 BR, family room, 2 BA and kitchenette. It has a separate entrance, although the entire area is accessible from inside. This separate suite does not have to be heated if we are not using it.

The entire house is handicap accessible, although the accommodations are subtle since they were designed in rather than added on.

We can handle any one of the situations where we need:

1. Long term care -- get live in help where part of the payment is living in the suite.

2. Financial help to a family member -- come stay with us. Anywhere from rent free and we provide for all expenses to shared expenses. I would far rather do this than just send money. If you don't want to come live with us then you really don't need our help.

3. With Medicare it is not obvious to me that medical costs would ever be too high to afford.

Plus, we have accommodations for children and grandchildren to visit and enjoy the situation with both family time and alone time.

This solution is not for everyone, but it is worth consideration if it fits your lifestyle.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by celia »

We lived on one income for the last few years before we were both retired. We figured we were ready when:
* the mortgage was paid off
* the kids were done with college
* our accounts were decently funded

That accounted for 60-70% of the single income we were then living on.

Our pensions were then projected to pay out the other 35-40% each year. Since we were able to live off that amount, we fully retired. SS later became a bonus.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by CurlyDave »

goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
I have been retired (actually more FI than retired) for 11 years, DW for 6.

I am going to introduce a different concept into this discussion in that I see a major difference between what I will call "necessary expenses" and "actual spending".

We have pensions and SS which are sufficient that either one or both of us could live on them without any actual deprivation. Living without actual deprivation is what I call "necessary expenses", and this is closer to 60% of pre-retirement gross income than 80%. I think that 80% of taxable disposable income is a good rule of thumb. But, we were saving 14% of our income (17% with company match) pre-retirement. And there is no SS tax in retirement, so there is another ~6% that is no longer going out.

BUT, our actual spending is much higher than that. Our investments have done well, and we enjoy spending the fruits of those investments. Plus we have rental real estate, which is why I say more FI than retired. I manage our properties, which is maybe a 1/4 time job. We also spend the income from those properties. As I get older, I hire out the maintenance work I used to do myself, and we have a resident manager for day-to-day issues. OTOH inflation is my friend, not my enemy as for many retired people, since rents keep going up but mortgages stay the same.

So, our actual total spending is higher than pre-retirement. We certainly have room to reduce it if necessary, but being the richest people in the graveyard holds little appeal...
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by marcopolo »

goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
Pre-retirement income is largely uncoupled from retirement needs.
Some people save 10% or less, others save 50% or more. The retirement needs relative to income will be vastly different.

Many recommend thinking in terms of pre-retirement expenses. While that is better than income, I still think it falls way short of the mark in assessing retirement needs. Unless you plan to spend your retirement living just like you did before retirement, the spending is likely to change, maybe drastically.

What will you do with your free time, will you travel more? Will you move to a different state/country? What will you do about healthcare?

I took the approach of doing a bottoms up analysis of expenses I expect to have in retirement, many categories were based on pre-retirement spending, with adjustments, others were completely new, others went away. In the end, i projected my retirment expense to be about roughly 50% higher than they were during pre-retirment years leading up to retirement. Which works out to be about 30% of pre-retirement income, for what its worth. I am only a year into it so far, and came in just a little below that estimate last year.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by The Wizard »

goodenyou wrote: Sun Jan 27, 2019 6:20 pm I have seen some "advisers" projecting an 80% pre-retirement income need in retirement. That seems very high. What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
Need or Want?

I'm retired six years thus far and I aimed to have around 100% of my net working income in retirement. Net means after subtracting out OASDI (FICA) contribution and 403(b) max contribution during working years.

So this means about the same level of income hitting my checking account each month. It also means, in my case, about the same AGI and taxable income in retirement as my final working years, but this is complicated by Roth conversions I'm doing in my pre-70 retirement years.

This level of income exceeds my basic needs by a comfortable amount and allows me to do more travel in retirement...
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by MikeG62 »

goodenyou wrote: Sun Jan 27, 2019 6:52 pm
...Are you projecting that your expenses will stay the same, go down or up? Mine will (should) go down significantly (I think). I am asking those who may have some wisdom of unexpected costs or unexpected savings.
DW and I are in our 4th year of early retirement so some real life experience here. Our expenses in retirement have increased considerably from what we spent while I was working, when we were living well below our means (but far from frugally). In retirement we are now living up to the level of our means. The additional spending is largely in the area of travel and entertainment (followed by health care expenses).

I would dispense with any method that measures retirement spending based upon a % of your income. Your model should absolutely be based upon what you expect to spend (and this should be built up in a bottoms up manner - line item by line item). I'd suggest building a model of what you spend now and adjust that as appropriate.
Last edited by MikeG62 on Tue Jan 29, 2019 7:40 am, edited 1 time in total.
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The Wizard
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by The Wizard »

MikeG62 wrote: Mon Jan 28, 2019 7:55 am
...I would dispense with any method that measures retirement spending based upon a % of your income. Your model should absolutely be based upon what you expect to spend (and this should be built up in a bottoms up manner - line item by line item). I'd suggest building a model of what you spend now and adjust that as appropriate.
The problem with the bottoms up approach is that it might not account sufficiently for apparent one of a kind expenses like the robot vacuum cleaner I bought a month ago, and similar repairs or replacements.

I nonetheless went through this exercise myself two years before retiring, creating a detailed multipage spreadsheet listing everything except recreational travel.
My monthly/annual number from that exercise came out quite modest, so I set that aside and used the more robust Top Down method.

Top down starts with your net pay after things like FICA and tax deferred retirement contributions are subtracted, plus other "adjustments". With my moderate employment salary, the only adjustment I made was for the $6500 per year I contributed to my Roth IRA. Any money I saved in taxable accounts while working was for medium term needs like new car purchases, not retirement.

Anyhow, your Net Income (with adjustments) correlates to your Standard of Living in your latter working years and is a good starting point for continuing the same SoL in retirement.
I planned more recreational travel in retirement, so I adjusted my target monthly income upwards a bit from there...
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by aristotelian »

You really should ignore popular rules-of-thumb. All that matters is your spending. If you will spend $50K per year, that is the number you need to plan to sustain. It is completely irrelevant whether you made $100K or $500K during your career.

I am aiming for a number that is about 40% of my gross income.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by MikeG62 »

The Wizard wrote: Mon Jan 28, 2019 9:54 am
MikeG62 wrote: Mon Jan 28, 2019 7:55 am
...I would dispense with any method that measures retirement spending based upon a % of your income. Your model should absolutely be based upon what you expect to spend (and this should be built up in a bottoms up manner - line item by line item). I'd suggest building a model of what you spend now and adjust that as appropriate.
The problem with the bottoms up approach is that it might not account sufficiently for apparent one of a kind expenses like the robot vacuum cleaner I bought a month ago, and similar repairs or replacements.
You are correct - there will be one-off expenses (including repairs and maintenance to ones home, which could be quite significant). This is why I indicated the historical spend might need to be adjusted as appropriate. I'd recommend putting in a placeholder for one-off spending. We have a large amount budgeted in a category I call "travel and entertainment and one-off expenses". Some years the one-off amounts will be larger than (and the travel smaller) and in other years the opposite will be true. Some years we might overspend this category and other years underspend it (I think Sheepdog has talked about this and he's been retired for over two decades I believe). We just don't want to overspend it on average.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by cinghiale »

ralph124cf wrote,
I have been retired five years, and our spending is approximately 160% of our preretirement spending. More time to do fun things.
Pretty much this^^^^^, three years into retirement. The desire to travel, see, do, experience, learn, enjoy, grow, and encounter is primary at this point in (early) retirement. Did anyone note the sad and premature death of Henry S. (Harry) Lodge, co-author of Younger Next Year, of prostate cancer at age 58? Another reminder of how there are no guarantees.

If the savings numbers begin to dwindle, we can adjust. For now, though, expenses are high and will remain so for another two or three years, minimum. We want to build up a storehouse of memories. We want to look back, years from now, with zero regrets. Savings are a form of delayed consumption and delayed gratification. For us, the season of delaying has ended.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by Earl Lemongrab »

I don't project such things. It's not a useful calculation. Expense-based calculations are the useful projection. Figure out what you'll need to spend in retirement, look your income (pensions SS etc.) and withdrawal needs. Factor in various inflation values.
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Re: What Percentage of Your Pre-Retirement Income are You Projecting You Will Need?

Post by stufunds »

goodenyou wrote: Sun Jan 27, 2019 6:20 pm What are you projecting for your needs? For those retired, what did it turn out to be? More or less than projected?
I retired early in May 2012 at the age of 47. I’ve never been married and have no children.

When I was planning for retirement, I did not bother using the % of income rule of thumb. I didn’t feel that the results would be meaningful because I was saving a very large portion of my income in the last years of my career.

I’m more used to financial planning programs that require the entry of a projected expense figure, excluding taxes. The programs estimate future taxes based on expected non-tax expenditures and other inputs.

Detailed information on my pre-retirement expenses has been readily available to me because I’ve been a Quicken user since the mid-1990s.

In the years leading up to my retirement, I think I tried to estimate expenses in retirement at the line-item level (e.g., taking out obvious things like commuting costs and adding in some guess at additional health insurance premiums). I don’t remember if the resulting projection came out to be much higher or lower than my actual post-retirement expenses.

But thanks to Quicken, I can tell you what my actuals turned out to be, using the twelve months immediately preceding my retirement as a base. Again, these are expenses excluding taxes.

Year 1: 75%
Year 2: 72%
Year 3: 78%
Year 4: 84%
Year 5: 89%
Year 6: 100%
Year 7 (estimated): 112%

Year 7 included a significant uptick in discretionary travel, a health care scare (requiring expensive tests), and the acquisition of some photography equipment. I’m hoping that I’ll be able to work my way down to something like 105% or less in Year 8.

If I had to do it over again, I would still use Quicken to compile a pre-retirement spending figure based on my actual expenditures, but I would simply use that figure, unadjusted, as the estimate for my post-retirement expenses. Assume 100% of pre-retirement spending (excluding taxes) in other words.

As for taxes, my actual taxes are much lower than the estimates from the financial planning programs. However, I’m reluctant to override the programs because the discrepancy may simply reflect the fact that I have more opportunities to minimize taxes now (e.g., realization of capital gains) than I will in my later retirement years (e.g., pension income, RMDs). While the planning programs may overestimate or underestimate my taxes in any given year, they may turn out to be correct for my retirement as a whole.

Hope this helps.
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