Retirement spending estimates?

In My Humble Opinion
1

I repeatedly see magazine articles that recommend planning your finances so that you’ll have enough to be able to spend an amount equal to 75% of your pre-retirement income. The percentage may vary a bit from article to article, but the big problem is that they never specify whether the pre-retirement income against which this 75% is calculated includes:

A) the amount you are saving each year for retirement, and/or
B) matching amounts contributed each year by your employer.

In the case of me and my wife, we are saving a lot. We are saving 26% of our combined pre-tax base salary in tax-advantaged retirement plans provided by our employers, who are also providing matching amounts that add up to 6.4% of our combined base salary. So we are currently living on 74% of our base salary (and we typically save/invest about 25% of that every year too).

So do we plan our retirement around an annual spending goal of

A) 75% of our base salary,
B) 75% of (our base salary + employer matching retirement contributions),
C) 75% of (our base salary - our retirement savings contribution), or
D) something else?

In our case, the difference is substantal: option C) is about 3/4 oif option A), so choosing the correct retirement spending target makes a big difference in determining how much we ought to be contributing to retirement saving every year.

2

I saved much like you and after a couple years of retirement experience, I vote for A) - or less.

You point out that you already live on 74% so why can’t you continue?

That said, I think those magazines are crap. Far more important to figure out what you spend and what you could do without if needed.

3

You really need the advice of retirement financial counselor. Take the generic magazine articles with a grain of salt. The magazines continue to regurgitate the same crap over and over despite all appearances the pre-2007/2008 economy attitudes today no longer apply. We’re not far enough into this other economy to offer generic opinions. I offer that because IMHO the retirement outlook of your parents and grandparents, be it the economy, employer pensions, 401(k), Social Security, etc., no longer apply at all. Everything has changed at the base level and I don’t think we will see it ever again.

A qualified retirement financial counselor will take into account your specific lifestyle right now, what you are doing for retirement, and a number of possible goals. A really, really good qualified retirement financial counselor will even play projection games with you: what happens if the primary breadwinner dies tomorrow, what happens if there is a critical injury/illness to one of you in their working years and can never work again, etc. That sort of thing.

We had our work social/service committee sponsor a lunch seminar last fall with a qualified retirement financial counselor. This counselor specializes in our field of work (government employees) making him highly familiar with our retirement options, etc. In that hour he offered a number of regular scenarios on how to look at retirement planning be it five, ten, 15, 20, even 25 years away from retirement. Yes he used the standard retirement statistics the magazine articles use (that I complained about above) but he split them between pre- and post-2007/2008 financial pictures. He also ran pre- and post-2007/2008 scenarios just to show how different the economy is today and using old formulas with today’s money and today’s attitudes will hurt you. He did his best to keep it all at a level everyone could grasp.

At the end of the hour he offered a signup list to anyone desiring a free one-hour consultation later, specific to your own needs. If you took him up on the free consultation he asked you bring to the table your current income, savings and retirement details, projections for retirement, etc. At my free consultation he also asked about me and my wife personally so as to get a feel for our approach to how we spend money right now, thoughts for retirement (move? health? leaving anything after death?). He explained several economic scenarios, using detailed pre-2007/2008 data and where retirement options might fail, or succced, in this new economy.

If you are looking for actual numbers he offered:
[ul]
[li]Max out all retirement savings allowed under law, regardless if your employer offers matching. Just do it.[/li][li]Use Roth IRAs above any standard IRAs. If you can have Roth 401(k) account ability, do it as as well.[/li][li]Max out as much standard savings as you can. Strive for a minimum savings of two years of your total gross income. The old six-12 months of after tax savings doesn’t work in this economy. Make savings a mandatory expense from every paycheck, ahead of everything but housing, insurance, utilities and food.[/li][li]If you have a mortgage, do your best to keep your interest rate low, make extra principal payments, but do not pay off the mortgage early. Take advantage of the interest tax deduction for as long as possible. Any extra money that you could apply to principal payments dump into standard savings.[/li][li]Seriously consider your lifestyle. One doesn’t have to live frugally but don’t waste money.[/li][li]If you smoke, quit. That alone will pay enormous financial and health dividends. (Neither of us smoke and rarely drink so no benefit to us.)[/li][/ul]
As I said at the beginning, you really need the advice of retirement financial counselor.

4

Are you sure they are talking about spending 75% of your income? I thought the figure most commonly cited was that your expenses would be about 75% of what they were while you were working. So if you currently spend $8,000 per month, in retirement you could expect to spend $6000 per month. These calculators generally take into account that your home will be paid off, you won’t need to pay for work clothes or commuting, etc.

5

Too late to edit, but wanted to add links to two articles I found on a quick search. One says 60-80% if you downsize; the other says 65-70%, but they are both talking about percentages of living expenses rather than income.

MarketWatch

WikiHow

6

I’m looking right now at an article from T. Rowe Price’s “Investor” magazine, and it says:

I have a couple of other articles (also from them) that quote the same rule of thumb.

The percentage changes in this article, but they’re still using preretirement income rather than expenses) as a basis.

7

We’ve played around with some retirement planning calculators, and they are definitely talking about income, not expenses. If you ratchet up your income your income needed to retire on goes up right along with it.
While people in general don’t save enough, these tools seem to be designed to scare you into putting more into your accounts with them. They are way too simplistic.
For instance, if you have big expenses for work (suits, an expensive commute) the planners never consider how retiring reduces your expenses. Second, they assume a constant level of spending. However people tend to spend more just after they retire, and are healthy, and less later on. My father-in-law is 97, very healthy and competent, but is not about to be taking any long trips any time soon.

I definitely agree about getting a financial planner. He or she can look at the real situation. We must be doing well because ours doesn’t even yell at us. :smiley:

8

But their discussion of how they are determining the percentage all revolves around expenses. I think the element that is missing here is taxes. You need a retirement income that will be large enough after taxes to cover your expenses. If you calculate your income needs based solely on expenses, you will miss the mark because you haven’t accounted for taxes. That said, I see no reason to include savings/retirement contributions in the base income number, since you are not going to be needing them in retirement.

It certainly doesn’t make sense that if your income increases, but you put all of the excess into retirement, you need a higher income in retirement.

9

I’m not quite clear on what you’re getting at here. Aren’t taxes an expense?

10

75% of income is a rule of thumb for people who don’t know how to plan or budget.

You need to have enough income that you can support yourself in the lifestyle you actually want to live, and enough buffer that you’re not going to run out if there are a few bumps in the road.

How much that is depends on your lifestyle and expenses. It doesn’t really have anything to do with your income.