Will I really need 80% replacement during retirement?

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Wanderingwheelz
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Joined: Mon Mar 04, 2019 8:52 am

Re: Will I really need 80% replacement during retirement?

Post by Wanderingwheelz »

smitcat wrote: Wed Oct 28, 2020 7:35 am
Wanderingwheelz wrote: Wed Oct 28, 2020 7:28 am Many higher earning self employed people who are paying for very expensive health insurance/health care (i.e. no subsidies) who are not big spenders otherwise (no mortgage, not overdoing luxury items) can see a massive savings on health care if they’re able to keep their MAGI under the level necessary in their state to qualify for ACA subsidies. My wife and I ought to be able to do that since it’s $65,000 in our state, and we have a large brokerage account that we can draw from that isn’t loaded up with cap gains.
How would higher earner self employed folks be able to keep thier MAGI under the limit if most of their earning have gone into savings?
How would the brokerage account not be somewhat loaded with cap gains?
In our case I went years holding stocks in our tax deferred accounts and cash and bonds in our joint brokerage account. Over the last couple of years I’ve realized large cap gains inside our IRAs to replace the stocks with bonds and I’ve bought stocks with the funds that were in cash/bonds in our joint accounts. Of the nearly $2MM in the joint account only about 15% of that is cap gains since the stock ETFs haven’t been owned all that long. The real gains were realized in the IRAs. So, we have a lot of money that we can use that is return of principal, not gains. There are even lots that I can sell for a loss if I need to offset gains taken in any given tax year, going forward.
Being wrong compounds forever.
smitcat
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Re: Will I really need 80% replacement during retirement?

Post by smitcat »

Wanderingwheelz wrote: Wed Oct 28, 2020 9:29 am
smitcat wrote: Wed Oct 28, 2020 7:35 am
Wanderingwheelz wrote: Wed Oct 28, 2020 7:28 am Many higher earning self employed people who are paying for very expensive health insurance/health care (i.e. no subsidies) who are not big spenders otherwise (no mortgage, not overdoing luxury items) can see a massive savings on health care if they’re able to keep their MAGI under the level necessary in their state to qualify for ACA subsidies. My wife and I ought to be able to do that since it’s $65,000 in our state, and we have a large brokerage account that we can draw from that isn’t loaded up with cap gains.
How would higher earner self employed folks be able to keep thier MAGI under the limit if most of their earning have gone into savings?
How would the brokerage account not be somewhat loaded with cap gains?
In our case I went years holding stocks in our tax deferred accounts and cash and bonds in our joint brokerage account. Over the last couple of years I’ve realized large cap gains inside our IRAs to replace the stocks with bonds and I’ve bought stocks with the funds that were in cash/bonds in our joint accounts. Of the nearly $2MM in the joint account only about 15% of that is cap gains since the stock ETFs haven’t been owned all that long. The real gains were realized in the IRAs. So, we have a lot of money that we can use that is return of principal, not gains. There are even lots that I can sell for a loss if I need to offset gains taken in any given tax year, going forward.

Will not excessive taxes be due when you have RMD's and SS?
We could easily construct a number of years that have low taxes at the expense of a higher tax problem down the road.
One reason for the attraction of Roth conversions before RMD's and SS or pensions.
tibbitts
Posts: 24121
Joined: Tue Feb 27, 2007 5:50 pm

Re: Will I really need 80% replacement during retirement?

Post by tibbitts »

smitcat wrote: Wed Oct 28, 2020 9:38 am We could easily construct a number of years that have low taxes at the expense of a higher tax problem down the road.
Finally: something in finance that I'm a proven expert at.
Wanderingwheelz
Posts: 3301
Joined: Mon Mar 04, 2019 8:52 am

Re: Will I really need 80% replacement during retirement?

Post by Wanderingwheelz »

smitcat wrote: Wed Oct 28, 2020 9:38 am
Wanderingwheelz wrote: Wed Oct 28, 2020 9:29 am
smitcat wrote: Wed Oct 28, 2020 7:35 am
Wanderingwheelz wrote: Wed Oct 28, 2020 7:28 am Many higher earning self employed people who are paying for very expensive health insurance/health care (i.e. no subsidies) who are not big spenders otherwise (no mortgage, not overdoing luxury items) can see a massive savings on health care if they’re able to keep their MAGI under the level necessary in their state to qualify for ACA subsidies. My wife and I ought to be able to do that since it’s $65,000 in our state, and we have a large brokerage account that we can draw from that isn’t loaded up with cap gains.
How would higher earner self employed folks be able to keep thier MAGI under the limit if most of their earning have gone into savings?
How would the brokerage account not be somewhat loaded with cap gains?
In our case I went years holding stocks in our tax deferred accounts and cash and bonds in our joint brokerage account. Over the last couple of years I’ve realized large cap gains inside our IRAs to replace the stocks with bonds and I’ve bought stocks with the funds that were in cash/bonds in our joint accounts. Of the nearly $2MM in the joint account only about 15% of that is cap gains since the stock ETFs haven’t been owned all that long. The real gains were realized in the IRAs. So, we have a lot of money that we can use that is return of principal, not gains. There are even lots that I can sell for a loss if I need to offset gains taken in any given tax year, going forward.

Will not excessive taxes be due when you have RMD's and SS?
We could easily construct a number of years that have low taxes at the expense of a higher tax problem down the road.
One reason for the attraction of Roth conversions before RMD's and SS or pensions.
Yes, but I won’t need to take RMDs until age 70.5 and Medicare (Post age 65) will obviously leave us with much lower health insurance costs than what my wife and I are paying now.

Roth conversions would definitely be on the table up to and until the ACA limits for MAGI are reached. My wife and I don’t have massive tax deferred accounts since as self employed people we use SIMPLE IRAs for our businesses, thus having lower contribution amounts. Of our entire net worth, including our home, tax deferred accounts only account for about a quarter which includes a good size rollover from my only employer before becoming self employed, which is very low for most folks here on Bogleheads who are in their 40s.

The trick to retiring early and making smart use of the ACA is to have substantial savings outside of tax deferred accounts, which I am sure you know but it’s worth mentioning. Otherwise, yes, Roth conversions can raise you over the ACA thresholds for subsidies.
Being wrong compounds forever.
smitcat
Posts: 13439
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Re: Will I really need 80% replacement during retirement?

Post by smitcat »

Wanderingwheelz wrote: Wed Oct 28, 2020 1:03 pm
smitcat wrote: Wed Oct 28, 2020 9:38 am
Wanderingwheelz wrote: Wed Oct 28, 2020 9:29 am
smitcat wrote: Wed Oct 28, 2020 7:35 am
Wanderingwheelz wrote: Wed Oct 28, 2020 7:28 am Many higher earning self employed people who are paying for very expensive health insurance/health care (i.e. no subsidies) who are not big spenders otherwise (no mortgage, not overdoing luxury items) can see a massive savings on health care if they’re able to keep their MAGI under the level necessary in their state to qualify for ACA subsidies. My wife and I ought to be able to do that since it’s $65,000 in our state, and we have a large brokerage account that we can draw from that isn’t loaded up with cap gains.
How would higher earner self employed folks be able to keep thier MAGI under the limit if most of their earning have gone into savings?
How would the brokerage account not be somewhat loaded with cap gains?
In our case I went years holding stocks in our tax deferred accounts and cash and bonds in our joint brokerage account. Over the last couple of years I’ve realized large cap gains inside our IRAs to replace the stocks with bonds and I’ve bought stocks with the funds that were in cash/bonds in our joint accounts. Of the nearly $2MM in the joint account only about 15% of that is cap gains since the stock ETFs haven’t been owned all that long. The real gains were realized in the IRAs. So, we have a lot of money that we can use that is return of principal, not gains. There are even lots that I can sell for a loss if I need to offset gains taken in any given tax year, going forward.

Will not excessive taxes be due when you have RMD's and SS?
We could easily construct a number of years that have low taxes at the expense of a higher tax problem down the road.
One reason for the attraction of Roth conversions before RMD's and SS or pensions.
Yes, but I won’t need to take RMDs until age 70.5 and Medicare (Post age 65) will obviously leave us with much lower health insurance costs than what my wife and I are paying now.

Roth conversions would definitely be on the table up to and until the ACA limits for MAGI are reached. My wife and I don’t have massive tax deferred accounts since as self employed people we use SIMPLE IRAs for our businesses, thus having lower contribution amounts. Of our entire net worth, including our home, tax deferred accounts only account for about a quarter which includes a good size rollover from my only employer before becoming self employed, which is very low for most folks here on Bogleheads who are in their 40s.

The trick to retiring early and making smart use of the ACA is to have substantial savings outside of tax deferred accounts, which I am sure you know but it’s worth mentioning. Otherwise, yes, Roth conversions can raise you over the ACA thresholds for subsidies.
"My wife and I don’t have massive tax deferred accounts since as self employed people we use SIMPLE IRAs for our businesses, thus having lower contribution amounts"
I did not realize you were unable to defer the taxes while working as higher earners , you paid along the way. We were self employed for quite a while but between our 401K's and HSA's the accounts do add up.

"The trick to retiring early and making smart use of the ACA is to have substantial savings outside of tax deferred accounts, which I am sure you know but it’s worth mentioning."
With substantial savings outside of tax deferred accounts utilizing the ACA moves from a challenge to impossible.
pennywise
Posts: 973
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Re: Will I really need 80% replacement during retirement?

Post by pennywise »

TNWoods wrote: Mon Oct 26, 2020 11:26 am I don't need anywhere close to 80% of what I make NOW, so why would I need 80% when I retire?
Our income post retirement declined ~35%. So theoretically we only have 65% to live on now.

However our spending level pre retirement was never more than ~40% of our income.

Our monthly spending post retirement has shown ~0% difference in our pre retirement spending

We never spent anything close to 80% of our income in our pre retirement life together and aren't spending 80% in post retirement life either.

Life sure is 100% good though :D
trueblueky
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Joined: Tue May 27, 2014 3:50 pm

Re: Will I really need 80% replacement during retirement?

Post by trueblueky »

Wanderingwheelz wrote: Wed Oct 28, 2020 7:28 am
Yes, but I won’t need to take RMDs until age 70.5 and Medicare (Post age 65) will obviously leave us with much lower health insurance costs than what my wife and I are paying now.
age 72
phxjcc
Posts: 1329
Joined: Thu Aug 23, 2018 3:47 pm

Re: Will I really need 80% replacement during retirement?

Post by phxjcc »

rhornback wrote: Sun Oct 25, 2020 5:36 pm
**snip**

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%.
Add up your fixed
Utilities, rent, taxes, insurance, prescriptions

Add semi-fixed: transportation, food, dependents

That is your baseline.

IFF (sic) you choose to travel, gamble, eat out, drive a new Porsche every year--then that can add up.

i personally believe most retirees will see an inverse bell shaped curve--high initially as they buy a "retirement car", travel and visit friends and relatives, then settle into a quiet life, then--at the end--need live-in or some other type of expensive care taking.
LivingTheDream
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Location: Savannah, GA

Re: Will I really need 80% replacement during retirement?

Post by LivingTheDream »

smitcat wrote: Wed Oct 28, 2020 7:35 am
"The trick to retiring early and making smart use of the ACA is to have substantial savings outside of tax deferred accounts, which I am sure you know but it’s worth mentioning."

With substantial savings outside of tax deferred accounts utilizing the ACA moves from a challenge to impossible.
Smitcat,
I disagree with your last statement. Prior to Medicare & Social Security (& without other pensions), living off of taxable accounts certainly allows early retirees an opportunity to qualify for ACA APTCs. As long as investments have low yields and are tax-efficient, pulling $75k annually in long-term capital gains allows you to keep income very low (& therefore qualify for high APTCs). I've been doing for 2+ years.
Living The Dream
smitcat
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Re: Will I really need 80% replacement during retirement?

Post by smitcat »

LivingTheDream wrote: Thu Oct 29, 2020 5:40 pm
smitcat wrote: Wed Oct 28, 2020 7:35 am
"The trick to retiring early and making smart use of the ACA is to have substantial savings outside of tax deferred accounts, which I am sure you know but it’s worth mentioning."

With substantial savings outside of tax deferred accounts utilizing the ACA moves from a challenge to impossible.
Smitcat,
I disagree with your last statement. Prior to Medicare & Social Security (& without other pensions), living off of taxable accounts certainly allows early retirees an opportunity to qualify for ACA APTCs. As long as investments have low yields and are tax-efficient, pulling $75k annually in long-term capital gains allows you to keep income very low (& therefore qualify for high APTCs). I've been doing for 2+ years.
What are yourt thoughts concerning....
1. 'substantial savings' outside of tax deffered accounts and
2. low yields and tax effecient
3. what to do with the tax deferred account earning and size prior to SS and/or pensions
LivingTheDream
Posts: 112
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Location: Savannah, GA

Re: Will I really need 80% replacement during retirement?

Post by LivingTheDream »

smitcat wrote: Thu Oct 29, 2020 5:56 pm
LivingTheDream wrote: Thu Oct 29, 2020 5:40 pm
smitcat wrote: Wed Oct 28, 2020 7:35 am
"The trick to retiring early and making smart use of the ACA is to have substantial savings outside of tax deferred accounts, which I am sure you know but it’s worth mentioning."

With substantial savings outside of tax deferred accounts utilizing the ACA moves from a challenge to impossible.
Smitcat,
I disagree with your last statement. Prior to Medicare & Social Security (& without other pensions), living off of taxable accounts certainly allows early retirees an opportunity to qualify for ACA APTCs. As long as investments have low yields and are tax-efficient, pulling $75k annually in long-term capital gains allows you to keep income very low (& therefore qualify for high APTCs). I've been doing for 2+ years.
What are yourt thoughts concerning....
1. 'substantial savings' outside of tax deffered accounts and
2. low yields and tax effecient
3. what to do with the tax deferred account earning and size prior to SS and/or pensions
I have 2/3 total portfolio in taxable accounts. Most of bond allocation is in IRA, so my taxable yield is about 1%. I plan on starting IRA withdrawals either when Medicare begins (65) or if ACA eligibility changes prior, to manage IRA total prior to RMDs.
Living The Dream
smitcat
Posts: 13439
Joined: Mon Nov 07, 2016 9:51 am

Re: Will I really need 80% replacement during retirement?

Post by smitcat »

LivingTheDream wrote: Thu Oct 29, 2020 6:21 pm
smitcat wrote: Thu Oct 29, 2020 5:56 pm
LivingTheDream wrote: Thu Oct 29, 2020 5:40 pm
smitcat wrote: Wed Oct 28, 2020 7:35 am
"The trick to retiring early and making smart use of the ACA is to have substantial savings outside of tax deferred accounts, which I am sure you know but it’s worth mentioning."

With substantial savings outside of tax deferred accounts utilizing the ACA moves from a challenge to impossible.
Smitcat,
I disagree with your last statement. Prior to Medicare & Social Security (& without other pensions), living off of taxable accounts certainly allows early retirees an opportunity to qualify for ACA APTCs. As long as investments have low yields and are tax-efficient, pulling $75k annually in long-term capital gains allows you to keep income very low (& therefore qualify for high APTCs). I've been doing for 2+ years.
What are yourt thoughts concerning....
1. 'substantial savings' outside of tax deffered accounts and
2. low yields and tax effecient
3. what to do with the tax deferred account earning and size prior to SS and/or pensions
I have 2/3 total portfolio in taxable accounts. Most of bond allocation is in IRA, so my taxable yield is about 1%. I plan on starting IRA withdrawals either when Medicare begins (65) or if ACA eligibility changes prior, to manage IRA total prior to RMDs.
Which stock market funds are at 1% taxable yields? We have Vanguard, Schwab, Fidelity in total USA and international and I do not believe any of them are near that low.
How do you withdraw enough from the TIRa's within the 5 years (65-70) with them growing and still have enough room to avoid higher taxes later on?
LivingTheDream
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Location: Savannah, GA

Re: Will I really need 80% replacement during retirement?

Post by LivingTheDream »

smitcat wrote: Thu Oct 29, 2020 6:51 pm
LivingTheDream wrote: Thu Oct 29, 2020 6:21 pm
smitcat wrote: Thu Oct 29, 2020 5:56 pm
LivingTheDream wrote: Thu Oct 29, 2020 5:40 pm
smitcat wrote: Wed Oct 28, 2020 7:35 am
"The trick to retiring early and making smart use of the ACA is to have substantial savings outside of tax deferred accounts, which I am sure you know but it’s worth mentioning."

With substantial savings outside of tax deferred accounts utilizing the ACA moves from a challenge to impossible.
Smitcat,
I disagree with your last statement. Prior to Medicare & Social Security (& without other pensions), living off of taxable accounts certainly allows early retirees an opportunity to qualify for ACA APTCs. As long as investments have low yields and are tax-efficient, pulling $75k annually in long-term capital gains allows you to keep income very low (& therefore qualify for high APTCs). I've been doing for 2+ years.
What are yourt thoughts concerning....
1. 'substantial savings' outside of tax deffered accounts and
2. low yields and tax effecient
3. what to do with the tax deferred account earning and size prior to SS and/or pensions
I have 2/3 total portfolio in taxable accounts. Most of bond allocation is in IRA, so my taxable yield is about 1%. I plan on starting IRA withdrawals either when Medicare begins (65) or if ACA eligibility changes prior, to manage IRA total prior to RMDs.
Which stock market funds are at 1% taxable yields? We have Vanguard, Schwab, Fidelity in total USA and international and I do not believe any of them are near that low.
How do you withdraw enough from the TIRa's within the 5 years (65-70) with them growing and still have enough room to avoid higher taxes later on?
VFSUX (10% @ 2.53%), VDIGX (20% @ 1.68%), VWUAX (35% @ 0.25%), VTMSX (15% @ 1.35%), VWILX (20% @ 1.00%) = 1.08% overall. A little growth heavy but I was ok with that & was only way to keep yields low.

7 years (new RMD age of 72)... mostly bonds, so low growth (but also still concerned about RMDs & taxes). I'll continue to monitor IRA balances & might decide to start withdrawing from tIRAs earlier than 65.
Living The Dream
sailaway
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Re: Will I really need 80% replacement during retirement?

Post by sailaway »

Shallowpockets wrote: Mon Oct 26, 2020 11:16 am 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?
You can cut your expenses to save more/need less years ahead of time so that a small adjustment yields results, rather than drastic cuts later in life.



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.
If someone has other things they want to do with their life, then why wouldn't they stop saving once they have reached their goals? Sure, build in a buffer or ten, and if your work is fullfilling, more power to you, but don't just keep working because someone told you to work until a certain age.
retireIn2020
Posts: 808
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Re: Will I really need 80% replacement during retirement?

Post by retireIn2020 »

80% wow, that sounds like lame rule of thumb.

I feel spoiled, my 401k, IRA, HSA, taxable accounts are with Fidelity and they provide a tool that tracks your portfolio (including contributions), allows you to input your retirement date, current income, fixed expenses, discretionary expenses, social security income (year it starts), tax rate and other items.

Then it runs a Monte Carlo type algorithm that spits out a spreadsheet of total account balance by year based on your inputted length of retirement ( I use age 60 to 95). It also shows amount you'll need to withdraw each year, final balance, RMD's among other things.
It also gives you a percentage of success rate, mine is 135% so I guess I'm kind of frugal.

If anybody has Fidelity and is unaware of this planning tool, I highly recommend it!

:sharebeer
https://www.merriam-webster.com/dictionary/abide
tesuzuki2002
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Re: Will I really need 80% replacement during retirement?

Post by tesuzuki2002 »

I don't think I will.... I'm in my 40's I currently only spend about 45% of my income as it is.... The rest is invested....

I probably won't spend more than 30% of my current income when I retire on an annual basis...

With the exceptions being a year with excess medical year, buying a new car, or doing home repairs, etc...
smitcat
Posts: 13439
Joined: Mon Nov 07, 2016 9:51 am

Re: Will I really need 80% replacement during retirement?

Post by smitcat »

LivingTheDream wrote: Thu Oct 29, 2020 7:14 pm
smitcat wrote: Thu Oct 29, 2020 6:51 pm
LivingTheDream wrote: Thu Oct 29, 2020 6:21 pm
smitcat wrote: Thu Oct 29, 2020 5:56 pm
LivingTheDream wrote: Thu Oct 29, 2020 5:40 pm

Smitcat,
I disagree with your last statement. Prior to Medicare & Social Security (& without other pensions), living off of taxable accounts certainly allows early retirees an opportunity to qualify for ACA APTCs. As long as investments have low yields and are tax-efficient, pulling $75k annually in long-term capital gains allows you to keep income very low (& therefore qualify for high APTCs). I've been doing for 2+ years.
What are yourt thoughts concerning....
1. 'substantial savings' outside of tax deffered accounts and
2. low yields and tax effecient
3. what to do with the tax deferred account earning and size prior to SS and/or pensions
I have 2/3 total portfolio in taxable accounts. Most of bond allocation is in IRA, so my taxable yield is about 1%. I plan on starting IRA withdrawals either when Medicare begins (65) or if ACA eligibility changes prior, to manage IRA total prior to RMDs.
Which stock market funds are at 1% taxable yields? We have Vanguard, Schwab, Fidelity in total USA and international and I do not believe any of them are near that low.
How do you withdraw enough from the TIRa's within the 5 years (65-70) with them growing and still have enough room to avoid higher taxes later on?
VFSUX (10% @ 2.53%), VDIGX (20% @ 1.68%), VWUAX (35% @ 0.25%), VTMSX (15% @ 1.35%), VWILX (20% @ 1.00%) = 1.08% overall. A little growth heavy but I was ok with that & was only way to keep yields low.

7 years (new RMD age of 72)... mostly bonds, so low growth (but also still concerned about RMDs & taxes). I'll continue to monitor IRA balances & might decide to start withdrawing from tIRAs earlier than 65.
With these two strategies have you considered what taxes will be at 70 , 75 and beyond?
"A little growth heavy but I was ok with that & was only way to keep yields low."
"7 years (new RMD age of 72)"
In your monitoring have you considered using calculators to review these potential tax consequences? Perhaps the extended IORP and/or the really detailed RPM spreadsheet calculator that has been so valueable for our potential situation.
As mentioned above - we could certainly manage to keep income for tax/ACA purposes down for a number of years but in the long run that strategy loses out in a large way to a balanced approach over time.
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AerialWombat
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Re: Will I really need 80% replacement during retirement?

Post by AerialWombat »

.....
Last edited by AerialWombat on Fri Apr 02, 2021 11:40 am, edited 1 time in total.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
LivingTheDream
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Re: Will I really need 80% replacement during retirement?

Post by LivingTheDream »

smitcat wrote: Fri Oct 30, 2020 7:09 am
With these two strategies have you considered what taxes will be at 70 , 75 and beyond?
"A little growth heavy but I was ok with that & was only way to keep yields low."
"7 years (new RMD age of 72)"
In your monitoring have you considered using calculators to review these potential tax consequences? Perhaps the extended IORP and/or the really detailed RPM spreadsheet calculator that has been so valueable for our potential situation.
As mentioned above - we could certainly manage to keep income for tax/ACA purposes down for a number of years but in the long run that strategy loses out in a large way to a balanced approach over time.
Thanks for the suggestions. I've run i-orp, but not recently. I'll look at both & see what they say.
Living The Dream
Claudia Whitten
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Re: Will I really need 80% replacement during retirement?

Post by Claudia Whitten »

80 seems about right. I just did a back-of-napkin calculation, and for me it's 75 percent.
rockstar
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Re: Will I really need 80% replacement during retirement?

Post by rockstar »

80% seems high to me.

After you take out 401k, HSA, medical, dental, payroll taxes, and withholding, what percentage are you actually living on?
howard71
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Re: Will I really need 80% replacement during retirement?

Post by howard71 »

It's been about 50% of our salaries for us.

We were saving and investing half of our salaries in the 15 or so years leading up to retirement and then just stayed in the habit of living on that budget.
Claudia Whitten
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Re: Will I really need 80% replacement during retirement?

Post by Claudia Whitten »

howard71 wrote: Wed May 15, 2024 12:44 pm It's been about 50% of our salaries for us.

We were saving and investing half of our salaries in the 15 or so years leading up to retirement and then just stayed in the habit of living on that budget.
After taxes? I came up with 75 percent of pre-retirement gross income after backing out FICA, 401k, Medicare, etc. Back out taxes, and I get to about 50 percent. Don't forget taxes.
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HomerJ
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Re: Will I really need 80% replacement during retirement?

Post by HomerJ »

Claudia Whitten wrote: Wed May 15, 2024 12:50 pm
howard71 wrote: Wed May 15, 2024 12:44 pm It's been about 50% of our salaries for us.

We were saving and investing half of our salaries in the 15 or so years leading up to retirement and then just stayed in the habit of living on that budget.
After taxes? I came up with 75 percent of pre-retirement gross income after backing out FICA, 401k, Medicare, etc. Back out taxes, and I get to about 50 percent. Don't forget taxes.
Your taxes are not likely to be anywhere near that high in retirement. Unless you're super rich, and pulling everything from an IRA, and nothing from taxable.

You only pay capital gains on the GAINS in taxable. You've got $500,000 in a taxable brokerage account, $250,000 of that you saved, $250,000 is gains, so if you pull $50,000 out a year every year for the next 10 years, you'll only be paying 15%-20% on the part that is gains.

So even if you're in top bracket, pulling $50,000 out of that account, you'd only pay20% on $25,000 or $5,000 in taxes, or 10% of the money you're pulling/spending.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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HomerJ
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Re: Will I really need 80% replacement during retirement?

Post by HomerJ »

The 80% doesn't make a lot of sense for most people, because in retirement, a lot of your bills go away.

A guy making $120,000 at 45 could be paying

$7,000 to FICA (SS and Medicare taxes)
$24,000 to a mortgage
$15,000 for savings
$14,000 for kid-related expenses

In retirement, he might have the house paid off, the kids are gone, no longer needs to save, etc.

He might only need $60,000 a year to live the exact same lifestyle he had during his working years making $120,000 a year.

And taxes are a lot less for the guy "making"/pulling $60,000 a year instead of $120,000.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
dcabler
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Re: Will I really need 80% replacement during retirement?

Post by dcabler »

Claudia Whitten wrote: Wed May 15, 2024 12:50 pm
howard71 wrote: Wed May 15, 2024 12:44 pm It's been about 50% of our salaries for us.

We were saving and investing half of our salaries in the 15 or so years leading up to retirement and then just stayed in the habit of living on that budget.
After taxes? I came up with 75 percent of pre-retirement gross income after backing out FICA, 401k, Medicare, etc. Back out taxes, and I get to about 50 percent. Don't forget taxes.
I started out that way - backing everything out and then plugging it into some tax software. You have to be a little careful when you do that because some items are pre-tax and some are post tax, so some iterating might be required.

Anyway, I did this only to come up with what I think our spending would need to be after retirement. That is, a tops-down look at things rather than starting from all of our individual line items for spending as a bottoms up analysis. It's a lot easier to do it tops down anyway.

However, now that I'm retired, it turns out that we can pull out just about the same as what my gross salary was. But tax is significantly less overall than when I was working because only a portion is subject to being taxed as income: that is, what we withdraw from our IRAs and that portion of distributions in our taxable account that are nonqualified. The remainder comes from selling shares of a stock fund in our taxable account and it's only the gains that are subject to tax which, for us, is 15% long term capital gains.

Now we're not withdrawing everything we could. No reason to at this point, but it's good to know we have plenty of margin for whatever comes along beyond baseline spending.

Cheers.
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Re: Will I really need 80% replacement during retirement?

Post by Claudia Whitten »

HomerJ wrote: Wed May 15, 2024 2:15 pm
Claudia Whitten wrote: Wed May 15, 2024 12:50 pm
howard71 wrote: Wed May 15, 2024 12:44 pm It's been about 50% of our salaries for us.

We were saving and investing half of our salaries in the 15 or so years leading up to retirement and then just stayed in the habit of living on that budget.
After taxes? I came up with 75 percent of pre-retirement gross income after backing out FICA, 401k, Medicare, etc. Back out taxes, and I get to about 50 percent. Don't forget taxes.
Your taxes are not likely to be anywhere near that high in retirement. Unless you're super rich, and pulling everything from an IRA, and nothing from taxable.

You only pay capital gains on the GAINS in taxable. You've got $500,000 in a taxable brokerage account, $250,000 of that you saved, $250,000 is gains, so if you pull $50,000 out a year every year for the next 10 years, you'll only be paying 15%-20% on the part that is gains.

So even if you're in top bracket, pulling $50,000 out of that account, you'd only pay20% on $25,000 or $5,000 in taxes, or 10% of the money you're pulling/spending.
Thanks. I hope you're right. I like to estimate on the high side. Once RMDs start, I have little doubt that my taxes will be higher than 25%, sadly (or happily).
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HomerJ
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Re: Will I really need 80% replacement during retirement?

Post by HomerJ »

Claudia Whitten wrote: Wed May 15, 2024 2:31 pm Once RMDs start, I have little doubt that my taxes will be higher than 25%, sadly (or happily).
happily.

It's an extremely good problem to have.
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Re: Will I really need 80% replacement during retirement?

Post by LittleMaggieMae »

It's all about how well you budget and if you include "future" expenses in your planning.

Say you are 60 and have a 10 year old car. You plan to stop working at 65. Your are still very happy with your 15 year old car.
How are you planning to pay for a new (or new to you vehicle)? which you might need to buy sooner than later (it might not make it to 20 or 25 years old)

What about your house - how will you pay for all the large lumpy expenses? Lets say you put a new roof on your house when you were 55 - will you have enough money to put another new roof on it when you are 80? What about the expenses that always go up property taxes and insurance. Or even utilities.

You can use any Big Lumpy Expense - new appliances, new carpeting, perhaps a plumbing issue (a water leak or new water heater or clogged drain that you just can't unclog yourself), paying someone to clean the gutters (or something else) when you can no longer do this chore.

I'm not sure people include a "line item" in their monthly or yearly expenses for Expensive/Big Cost necessary stuff they may have buy 5 or 10 or 20 years out into the future. And I don't think people earmark 100K of their "savings" to be used to maintain their home for next 25 or 30 years they will live there. (that 100K might also be used for increases in utilites, property taxes, insurances etc...not just a new roof).

I've witnessed a few too many elderly not necessarily run out of money - but be in danger of it because they can't afford to maintain their home or car or just the increase in everyday/every year expenses over 20 years.... They started out retirement comfortable and frugal and happy.

I kind of doubt the typical reader here will have this problem. I think it's safe to say a typical boglehead (even the ones who don't have a life long big income) think about and plan for the future. I use to think I could "retire" with 40K of after tax income per year. Alas I wouldn't be able to afford my house or vehicle long term on that kind of income with a Nest Egg that could only support 40K to 50K of after tax income per year. :)
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Re: Will I really need 80% replacement during retirement?

Post by RadAudit »

How long do you plan to live?

I'm 77 and have been retired for 14 years or thereabout. A quick back of the envelope SWAG using the rule of 72 says that if I make it until the early 80s almost everything will double in price from when I retired. Tack on RMDs, QCDs, a cruise or two, a new car, medical expenses, and I'd guess you'll spend more than 80% replacement of income at retirement.

Now need and spend may be different numbers.
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MathWizard
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Re: Will I really need 80% replacement during retirement?

Post by MathWizard »

If you are saving 50% of your gross income, you don't need to replace 80% of gross to maintain the same lifestyle.

The more you save, the less you need to save.

People who don't save much, and forget to account for health care costs and taxes in retirement, are the ones who will be hurting the most.
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Re: Will I really need 80% replacement during retirement?

Post by cosmos »

My 401k provider transamerica has the same 80% default number too. Shows me as partly cloudy instead of sunny even though I am saving the max allowed per year.

It may be true if I were going to retire in exactly the same place as I currently work/live but that will not be true. All i hope for now is stability and no hyperinflation in the next 35 years.
It's 106 miles to Chicago, we've got a full tank of gas, half a pack of cigarettes, it's dark... and we're wearing sunglasses. Hit it.
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Re: Will I really need 80% replacement during retirement?

Post by delamer »

MathWizard wrote: Wed May 15, 2024 4:09 pm If you are saving 50% of your gross income, you don't need to replace 80% of gross to maintain the same lifestyle.

The more you save, the less you need to save.

People who don't save much, and forget to account for health care costs and taxes in retirement, are the ones who will be hurting the most.
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Re: Will I really need 80% replacement during retirement?

Post by harvestbook »

All I know is life is much, much cheaper when you don't have a job.
I'm not smart enough to know, and I can't afford to guess.
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Re: Will I really need 80% replacement during retirement?

Post by Elysium »

We plan to live with about 32% to 35% of current income, including SS. That's because if I start using the 80% rule of thumb it will lead to an insane amount of retirement savings which we will never get to. Just a by product of having incomes risen substantially in our peak earning years, which is a by product of experience and skill sets in demand. I don't expect it to last forever, and if I use that figure it will be misleading. Instead, we look at half or less than that to live.
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Charles Joseph
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Re: Will I really need 80% replacement during retirement?

Post by Charles Joseph »

I was saving 40% of my gross income for the last six or seven years before I retired. So I'm spending maybe 80% of 60% of my gross salary now.

That's a pittance of my gross income while I was working, really.

Retirement isn't nearly as difficult as one thinks, if you're a good saver. Spend less than you earn; that is the key.
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Claudia Whitten
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Re: Will I really need 80% replacement during retirement?

Post by Claudia Whitten »

cosmos wrote: Wed May 15, 2024 4:44 pm All i hope for now is stability and no hyperinflation in the next 35 years.
This is the big one. Doesn't have to be hyperinflation. Anything above the Fed target (2%) is worrisome.
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Charles Joseph
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Re: Will I really need 80% replacement during retirement?

Post by Charles Joseph »

Claudia Whitten wrote: Thu May 16, 2024 12:49 pm
cosmos wrote: Wed May 15, 2024 4:44 pm All i hope for now is stability and no hyperinflation in the next 35 years.
This is the big one. Doesn't have to be hyperinflation. Anything above the Fed target (2%) is worrisome.
Agreed. But, my wife went out on her lunch hour on Tuesday, got lunch and did some grocery shopping at two public companies. She acknowledged the rising prices at both. My first comment was, "this is why it's good to own stocks. They can raise prices. They're a hedge against inflation." There's a tension between being a consumer and a stock owner.

Not that we want inflation, but...
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HomerJ
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Re: Will I really need 80% replacement during retirement?

Post by HomerJ »

The biggest problem with a rule based on "income" is that income changes far more than expenses.

So you're making $120,000 a year, saving $40,000 a year.

And you get a raise to $140,000 a year, but you don't change your expenses... Suddenly you are doing WORSE? Because you are farther away from 80%? Even though you are now saving $55,000 a year? I guess people should stop pursuing promotions.

My wife retired a couple of years ago, cutting our income from $240,000 a year to $160,000 a year.

But now we're doing BETTER? Because she quit? Because our income is LESS? Because we're closer to replacing 80% income now?

Always base your target on your desired or expected retirement EXPENSES.

My wife got to retire BECAUSE we're set to maintain our current and expected retirement expenses, even without her salary coming in. There was no reason for her to continue to work (There's really no reason for me to work either anymore, but who can argue with the wife?)
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Re: Will I really need 80% replacement during retirement?

Post by cosmos »

Claudia Whitten wrote: Thu May 16, 2024 12:49 pm
cosmos wrote: Wed May 15, 2024 4:44 pm All i hope for now is stability and no hyperinflation in the next 35 years.
This is the big one. Doesn't have to be hyperinflation. Anything above the Fed target (2%) is worrisome.
I am prepared to be very worried remainder of my days.
It's 106 miles to Chicago, we've got a full tank of gas, half a pack of cigarettes, it's dark... and we're wearing sunglasses. Hit it.
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Re: Will I really need 80% replacement during retirement?

Post by Wannaretireearly »

Heck no. Bringing up a family while saving is hard.
These have to be our highest spend years!

I expect to need 40% of my gross income.
“At some point you are trading time you will never get back for money you will never spend.“ | “How do you want to spend the best remaining year of your life?“
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Re: Will I really need 80% replacement during retirement?

Post by xxd091 »

Late to this thread and U.K. based Boglehead
Track everything on Quicken
Now 21 years rtd -78 years old as is wife
Our expenditure at retirement was the same as our working incomes -$88000 pa
This retirement income has remarkably remained at the actual same level ie $88000 pa-over all our retirement years so far
Lots of international travel (replacing working ?) but no other major expenditures
We have free at point of use Health Service in the U.K.-no expenditure required -big difference from US -especially as we age
Don’t see this income amount changing much as we are now slowing down
Half our income comes from State Old Age Pensions (US Social Security?) plus a Teacher’s pension-all index linked
Half income comes from an investment portfolio in tax free wrappers-3 global index funds only with a conservative asset allocation-34/60/6 where 6=2+ years of living expenses in cash
Portfolio much larger than when we commenced retirement-thanks to John Bogle
xxd091
thedaybeforetoday
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Re: Will I really need 80% replacement during retirement?

Post by thedaybeforetoday »

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.
So a retirement account, run by the financial industry, informed you to basically save more in your retirement account, which would, coincidentally, benefit the financial industry?

Weird.

A couple rules of thumb I follow:

Critical thinking
There are no rules of thumb
"When I was a kid my parents moved a lot, but I always found them." R. Dangerfield
dknightd
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Re: Will I really need 80% replacement during retirement?

Post by dknightd »

Claudia Whitten wrote: Wed May 15, 2024 11:51 am 80 seems about right. I just did a back-of-napkin calculation, and for me it's 75 percent.
The back of my napkin calculation said about the same thing when I retired.
So far the back of my napkin seems to have been about right.
We actually spend about the same as when working. Which was the plan. But no more SS tax, or saving for retirement - which added up to about 25% of what we were earning.

I'm sure it is different for everybody.

The perhaps ironic thing is people who are saving a lot probably need less than 75%, and they will likely be able to afford it. People who save less might need more than that 80%, but might not be able to afford it.

I consider the 80% salary replacement, and the 4% spending from portfolio, useful guidelines for somebody who is just starting to think about these things. Both could be more or less than what you need, or want. But they are reasonable starting points.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: Will I really need 80% replacement during retirement?

Post by dknightd »

thedaybeforetoday wrote: Fri May 17, 2024 5:36 am There are no rules of thumb
There are rules of thumb, they just may not apply to me, or you.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Silverado
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Re: Will I really need 80% replacement during retirement?

Post by Silverado »

dknightd wrote: Tue Oct 27, 2020 1:57 pm exactly. You have to figure out what you need and want

Edit: for a 30 year old, planning for the future, 80% is a reasonable target.
Pulled this older post forward. If I use what we currently make and spend (just a few years from retirement) the answer is about 22% all in. But, if I think back to the time period when I first thought about and started trying to learn about retirement and investing the number is definitely much closer to 80% of what we were making at the time. So, telling a 25-30 year old 80% is not a terrible thing. Anything to help them get in the mindset of saving/investing. Balanced with discouraging them of course.
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Re: Will I really need 80% replacement during retirement?

Post by dknightd »

Silverado wrote: Fri May 17, 2024 7:01 am
dknightd wrote: Tue Oct 27, 2020 1:57 pm exactly. You have to figure out what you need and want

Edit: for a 30 year old, planning for the future, 80% is a reasonable target.
Pulled this older post forward. If I use what we currently make and spend (just a few years from retirement) the answer is about 22% all in. But, if I think back to the time period when I first thought about and started trying to learn about retirement and investing the number is definitely much closer to 80% of what we were making at the time. So, telling a 25-30 year old 80% is not a terrible thing. Anything to help them get in the mindset of saving/investing. Balanced with discouraging them of course.

It is gratifying to see my thoughts have not changed much over the years. Thanks for pulling them back up.

Edit: maybe if I get bored I'll look back at all my previous posts here. I think they will probably be all consistent. Now I wonder, did I join and post on the forum before I retired?

I got bored, and searched, clearly searching this site does not work, or I do not know how to use it. My search returned things I did not say!
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
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Re: Will I really need 80% replacement during retirement?

Post by thedaybeforetoday »

dknightd wrote: Fri May 17, 2024 6:11 am
thedaybeforetoday wrote: Fri May 17, 2024 5:36 am There are no rules of thumb
There are rules of thumb, they just may not apply to me, or you.
Yes I stand (sit) corrected…
There are useless rules of thumb…
to me
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Re: Will I really need 80% replacement during retirement?

Post by Barkingsparrow »

cosmos wrote: Fri May 17, 2024 12:32 am
Claudia Whitten wrote: Thu May 16, 2024 12:49 pm
cosmos wrote: Wed May 15, 2024 4:44 pm All i hope for now is stability and no hyperinflation in the next 35 years.
This is the big one. Doesn't have to be hyperinflation. Anything above the Fed target (2%) is worrisome.
I am prepared to be very worried remainder of my days.
1. How was this 2% target ever derived?
2. From what I've read, the historical average is around 3.1%?
ROIGuy
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Re: Will I really need 80% replacement during retirement?

Post by ROIGuy »

HomerJ wrote: Thu May 16, 2024 9:57 pm The biggest problem with a rule based on "income" is that income changes far more than expenses.

So you're making $120,000 a year, saving $40,000 a year.

And you get a raise to $140,000 a year, but you don't change your expenses... Suddenly you are doing WORSE? Because you are farther away from 80%? Even though you are now saving $55,000 a year? I guess people should stop pursuing promotions.

My wife retired a couple of years ago, cutting our income from $240,000 a year to $160,000 a year.

But now we're doing BETTER? Because she quit? Because our income is LESS? Because we're closer to replacing 80% income now?

Always base your target on your desired or expected retirement EXPENSES.

My wife got to retire BECAUSE we're set to maintain our current and expected retirement expenses, even without her salary coming in. There was no reason for her to continue to work (There's really no reason for me to work either anymore, but who can argue with the wife?)
"Always base your target on your desired or expected retirement EXPENSES."
This is so true.
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