For years I heard a person needs about 75%-80% of their “normal” income once they go into retirement. The idea is you will save money on commuting and work related expenses.
But I just heard from a financial guru who said thats wrong and you will need all 100% of your pre-retirement income and possibly more since you will have more time to travel and do hobbies which all costs money.
So I’d like to ask those retired persons what you have found?
I think this is one of those ‘ask 100 people and get 100 answers’ things.
Your two examples have different premises. The first person said you need 80% because you’ll have less expenses. The second person said you’ll need 100% because you’ll have more expenses. Which is it? Are you going to retire to a life of watching TV or traveling the world?
Well, once I retire there are certain costs that do go away:
1 and 2 will be about 7%.
3 will be, well, whatever amount you were saving for retirement. If you were saving 15% of your pay, then that’s 15%.
So in the case above, that’s 22% that you won’t be paying in retirement. And the funny thing is, the more you save for retirement the easier it is to retire on a smaller amount, because you are accustomed to living on a lower percentage of your income. If you are only saving 5% for retirement, then you are used to living on 95%. Harder to make the lifestyle adjustment to living on only 70 or 80%.
Retired 10 years, so some inflation since I last worked but we are doing fine on 70% - about a third of that is SS. FWIW, we have always lived below our means.
I think Dag Otto has hit the salient point: since you *are *retired, you are no longer saving for retirement. This will make a large change to your budget balance. Lifestyle and health issues will of course factor in as well.
Also there’s a time-of-life thing - your mortgage is likely to be small, or completely paid off; your kids are likely to be reared and educated; etc.
Obviously, this varies depending on personal circumstances, so you need to model your own situation in life and spending aspirations. Does your retirement plan involve lots of flying business class to exotic destinations, or lots of fishing and pottering in the garden?
Recently retired here: Since our savings rate for most of our marriage has been around 20%, we already lived on 80% of income. I’m still tweaking my retirement income streams to match spending. I’m in a weird new world where it’s best to live paycheck to paycheck with nothing left over. Otherwise I’ll drop the excess into a low return savings acct at the end of the month, rather than leaving it in better earning investment accts.
Short answer: If you’re saving adequately, you should easily manage on 75-80% of income, because you’re already there. Add in a few tax changes, and a (hopefully) paid off house, and 70% shouldn’t be a burden at all.
How much of your income do you spend? That’s the relevant starting point for this discussion.
Imagine two people who need $50,000 to get by. One earns $50,000; the other earns $100,000.
It is true as some have noted that you may want to spend more in retirement on things like travel. And most of us spend more on health care as we get older. But also, as others have noted, some expenses (social security payments, saving for retirement, mortgage payments after you’ve paid it off) go down in retirement.
Oh, and the financial guru wants you to let him manage your money – for a nice fee – so he’s trying to convince you that you need the fabulous gains that he alone can get you. In reality, there is no evidence that financial gurus can, in the long run, earn better gains than you can do by yourself through low-fee broad-market index mutual funds. And that’s before you consider those fees the guru will charge you.
In the UK I see 2/3 quoted more often than 75%. For me, it’s all about paying off the mortgage. Currently, 50% of my net income after all deductions goes on mortgage payments (to be fair, it’s more like 30% of our household net income). With luck, by age 60 that will be paid off. Then there is the amount I put towards savings and investments (including pension) - currently that’s about 25% of my gross income (which is a lot - I choose to do this rather than, say, make car payments, as a result I have an older, cheaper car than many of my peers, and I’m fine with that). On the other hand, my work-related costs are pretty low since I commute by bicycle and rarely buy clothes.
Taking all that into account, I expect to be able to get by just fine on a gross retirement income of half what I make at the moment. Indeed, with the extra saving I do, I hope to be able to cover luxuries such as more holidays.
Thanks, great points.
Check with any old people you know, starting with your parents. What did they do when they retired?
My parents? No more kids to pay for. No more mortgage. No more saving for retirement. So, some major expenses gone.
But they also added some major expenses. In their golden years, they owned a couple of really lavish fifth-wheel trailers, and did a lot of road trips. They also did a lot of national and international travel (by air), and also flew around the country to visit us kids more often than they had when they were working. They also gifted us kids (and their grandkids) with a couple of nice group vacations together, paying for everything.
There was also some residence time in an independent-living retirement community, which isn’t cheap. There was also some residence time in an assisted-living facility, which was damned expensive.
Any retirement financial plan should make allowances for the final few years when you may need assisted living (average is $4K per month). As for the rest of your retirement, it comes down to what you think you might want to do with your time. Enjoy lazy mornings and casual strolls around local parks? Life’s gonna be cheap. First-class accommodations at overseas resorts? Hope you’re saving aggressively during your productive years.
It’s possible that your health may decline faster than you expect/hope, crimping any plans you’ve made for a sybaritic post-retirement lifestyle. So it may be foolhardy to life a super-stingy life now in an attempt to build up a massive nest egg, unless part of your goal is to leave a large inheritance for your heirs. But the other extreme possibility - a long, healthy retirement without the financial resources to do much of anything - also sucks.
Bottom line? Think about what you might want to do in retirement, and compose a few different annual budgets. Be realistic about expenses, and don’t forget to account for inflation. Then look at your existing nest egg, your current savings rate, and your SS forecast, and see if your nest egg at retirement will be able to meet your needs. Excel is great for this kind of stuff.
On the no kids and no mortgage. Thats a matter of timing.
You might have paid off your house and kicked the last kid out 10 years before you retired or maybe less but I doubt both events occurred 2 days before you retired so I’m guessing before retirement you already have lower expenses.
Now some people retire and then sell everything and move to Florida but that has its own issues.
You will also need Medicare supplemental insurance, more than likely, and that ain’t cheap.
We just met with our financial guy. The plan is that I hold off on retiring for another three years, so I can draw full Social Security benefits. My wife is already drawing her full benefits, and gets a pension. (If she dies before me, I get the pension in full.)
According to the numbers he crunched, we have a better than 95% chance of being able to live to 90, maintaining our current level of after-tax income, just drawing the growth from our current portfolio. I seriously doubt I will live to be 90, but at least I will leave the Lovely and Talented Mrs. Shodan a rich widow.
Of course, there are other things we could do - sell the house and use the equity to buy a townhouse, and re-invest the extra, which would eliminate the mortgage payment and give us some more cash. Or I could continue to work, either where I am or at an easier but lower-paying job. Or she could get a job where she gets paid (she’s a pastor, and she is currently working for free).
Or the economy crashes, we lose everything, the bank forecloses and kicks us out, and we wind up begging our bread in the streets and selling blood plasma. But I am assuming the term “President Bernie Sanders” doesn’t come into common parlance.
Regards,
Shodan
We retired with zero debt, which is a huge reduction in cash outflow. We both traveled extensively in our careers, so we don’t spend a lot of money on that, either. I have a woodworking shop, but nothing extravagant, and I’ve spent a couple thousand on guitars. My wife’s hobby is volunteering at the museum, so zero dollars. Our income is about half what we were earning, and it’s more than enough. We go where we please, eat what we want, and buy whatever needs buying. I honestly wouldn’t know what to do with 90% of our working income.
True, but remember, your employer is no longer covering health care, and most of Medicare isn’t free. The cost of Parts B and D will likely be more than the savings in taxes.
That’s another thing that depends very much on your individual situation - my employer will be paying the same portion of my health insurance premiums when I retire and start collecting my pension as it does for an active employee. I won’t need a separate Medicare Part D policy as my employer’s health coverage is creditable coverage, and my employer’s health plan reimburses me for Part B premiums - so I’m not in the same situation as someone whose employer coverage/contribution stops as of the last day on payroll.
Part B is presently $135 a month.
This is a huge part of retirement planning that needs to be factored into the when you retire date. Eliminate as much debt as possible while you are still a wage earner and before you are on a fixed income.
Pay off, or significantly down, on your mortgage, car loans, maybe you used to pay on two car payments while you were working, make it one or none. Credit cards, other monthly payments, make them go away however you can, and that may mean working longer than you plan to.
Yes, some expenses go up, and there will be new expenses that I didn’t have before, such as long term care insurance. I’ll probably spend a chunk on travel too. Everyone will have different circumstances, so perhaps Urbanredneck will need 100% or more.
Best thing to do is to understand your current expenses, how you realistically expect them to change, and what your future income streams will be in retirement and when they will be available. And don’t forget to account for inflation. I have a spreadsheet with all of my information, and I am frequently refining it and considering different scenarios to make decisions. For me that’s more comforting than depending on a rule of thumb, I have an idea where my money will come from and go to, but I also understand that there are unknowns and I only hope that I have adequately adjusted for those risks.
My part D is $32.40 a month. My drug copays are under $10 a month, it depends on what drugs you are on.
My Medigap is $314 a month, but that is the most expensive plan. You can get it a lot cheaper, and you can also get Medicare Advantage for probably less if it works for you.
My contribution to my excellent health care when I was working was close to that.
It costs, but it should not be a budget buster.