Before I retired we decided what we thought we would spend in retirement, which was a lot less than my income. We looked at our credit card statement and bills for the previous year to see what we would have to cut back on - and discovered we were already spending that much, and the rest was going into savings.
We have traveled quite a bit, but cheaply. And when you hit 80 traveling is going to be a big pain, so that kind of expense is front loaded.
When you are retired you have more time to look for bargains. We were only paying about $1,000 a month on our mortgage. We paid it off mostly because we don’t get a tax advantage any more so the effective rate we were paying was higher and thus it made more sense to move money out of other investments into that one.
You can control your taxes pretty well by controlling how much you move out of your IRA. That saves some.
The real issue is the unexpected big expense. like a new car or home improvements.
But if investment income and Social Security and/or pension covers your cash flow, you’ll be fine. The secret is to save, save, save.
I decided to retire early (at 57), since:
- I had no debt (and was earning interest from savings)
- I knew my pensions would more than cover my outgoings
- I live in the UK with UHC, so have no medical worries
- I wanted to travel
That was 9 years ago and I’m doing fine.
I travel to Las Vegas for one month each year 
and buy a new computer every 5 years.
My main consideration was filling my time, so:
- I took up bridge coaching
- I work with an autistic kid one hour / week
- I binge watch TV series
- I read a lot
- I play strategy computer games.
My retirement income is about 60% of my working income.
The difference is made up from:
- no mortgage
- my savings income is now tax-free (I used a Government allowance for 7 years)
- I don’t have travel costs to work
- I don’t need to put income into either a pension or savings
I plan to retire when the following criteria are met:
- I can pay off my mortgage from my 401k, and;
- After paying off the mortgage there is enough remaining in the 401k that it and SS will provide 85% of my current take home pay, and;
- At that withdrawal rate the 401k will last until I am at least 99 years old.
My assumptions are:
- 4% annual draw down of 401k funds
- Investment return of 3% annually on the remainder
- SS stays solvent and pays at currently projected rates
Given the above I am on track to hit that goal between ages 62 and 65 depending on investment returns in the interim.
Since you are planning out to age 99, but retiring between 62-65, when do you plan on taking SS?
I know it’s not quite the same as retirement, but having been unemployed a couple of times, I noticed that expenses actually go down when you’re not working. In particular, I didn’t have to pay for gas, car stuff, or for lunches, cleaning, etc…
So I imagine that between that and the fact that you’re not going to be putting 10-20% of your income away for retirement, your cash needs probably decrease somewhat.
Plus, most people probably hit retirement age with a little spare cash versus earlier in their lives for a couple of reasons- they pay their house off, their kids aren’t financially dependent anymore, etc…
Probably at retirement, but that’s not carved in stone yet. If I wait until 67 to take SS I will get about $750 more per month. If I take it at 62 I will get 5 additional years of benefit. If I wait until 67 to get the higher amount, I would have to live 11 additional years to “break even” on the 5 year “loss”.
I don’t know that I’ll live to 99, of course, but both my maternal grandparents lived into their 90’s and mom is still going strong at almost 80. I seems prudent to over plan…
I’m of the opinion that a lot of retirement advice comes from people who make money managing retirement assets, so they are incentivized to push people to save as much money as possible since they get a percentage of that money each year.
I can only base things on what I’ve seen in person. But one upper middle class couple had the following happen to their living expenses as they went from their 40s and 50s into their retirement period.
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Their kids became independent. No more daycare, extra food/car/clothes expenses, college funds, etc. That saves them a ton of money.
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Their home was paid off. No more mortgage.
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Their tax rate dropped dramatically. Retired people pay less in taxes (in part because you don’t pay fica taxes in retirement). Their combined federal/state/local tax rate dropped from about 35% of gross income before retirement down to 15% after retirement.
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You no longer need to save 10%+ of your gross income for retirement after you actually retire.
When you factor all that in, they were easily able to live on less than they spent in their 40s.
As far as travel, they do that but they only take three or four vacations a year. It’s not a gigantic amount of money.
My understanding is that as of right now (2019) its best to budget about $500 month per retired person per month on medical care excluding long term care. So Medicare B and D premiums, medigap premiums, co-pays, deductibles, health care not covered by Medicare, etc.
However that figure keeps going up. Supposedly it’ll be closer to $800/month by 2030. And again that doesn’t include long term care which can bankrupt a family easily.
I think a lot of people will just move to Latin America where an all inclusive health plan is $200 a month.
I retired on the last day of 1999. My mortgage had been paid off 8 years earlier and my youngest graduated from college 5 years before. On the other hand, I didn’t drive to work (walked one way and took a cheap commuter train the other) and always brown-bagged lunch, so that kind of expense didn’t change significantly. My pension fund was worth an annuity for about 5/6 of my final salary (the annuitant–my former employer–is taking a bath on that, but that’s not my problem) and government pensions make up the difference. We do some traveling, mainly visiting our kids who live in three different places. Our Quebec medicare covers all ordinary medical (but not dental) expenses. I still keep up my employer provided supplemental medical insurance even though I never collect enough to cover my premiums, let alone my employer’s putative contribution (which the province, although not the federal government, taxes me on for one simple reason: it covers me when I travel out of the country. All three kids live in the US.
So even though there has been 20 years of inflation, I am still not using my retirement savings and things seem fine. Let inflation gallop, however, and we could be in trouble. The stagflation on 1980 could kill me. That was when I bought a 5 year CD at 20%. Theoretically, my annuity could go up, but only after they recoup all their losses of the past 20 years. They have since gotten out of the business of giving annuities.
Another reason wealth managers overstate how much most people will need is they’re trying to convince potential clients that the returns achievable with a self-managed buy-and-hold strategy (around 6% annually long-term) will fall short. So people need to let the wealth manager take over and grow the money at 10-20%. The glitzy TV ads showing retirees living better than the target audiences are living are designed to sweeten the deal.
Only problem is, no one can deliver such returns long-term. But by the time a client realizes this, it’s too late.
A joke about how expensive it is to own a high-end Italian sports car is that you have to basically adopt a mechanic. But here, it’s no joke: if a wealth manger gets 1% per year of (some average of) your net worth for 30 years, they’ve carved off a bigger chunk of your money than one of your children may inherit.
If wealth managers could do what they claim, it might be worth considering. But reams of data indicate they can’t.
Very true. And I advise anyone who doubts this to go to one of the retirement planners from a financial services company and start playing with the numbers. You’ll find that, according to them, you’ll never win. You don’t get to enter your expenses in retirement - if you increase your income and savings they just increase your outlay after retirement so you still lose.
I found them pretty much worthless.
Wow you people in the UK really have a load taken off with your universal health care. Here in the US without a job - to get affordable healthcare (still pretty steep sometimes) - you can really be screwed.
I am just imagining how much you could save with just basic health care already paid/taken care of.
I went into the hospital about 18 months ago for an infection. I paid the bills etc and I am happy to be better. I just recently got 3 more bills from my primary care physicians office from that time period which were not paid by my insurance. The amount is about $250 but there is no way I could have planned to save for this back when the incident occurred. There are too many moving parts.
This podcast has a great explanation of just how much these seemingly small fees are actually a big drag on your money.
Its not just the UK, pretty much every nation on earth with a per capita income of 15k or higher has UHC (except the US).
But even medicare leaves a lot of people short on money. In 2013, people spent 41% of their social security income on medical care not covered by medicare. By 2030 it’ll be 50%. Social security is rapidly just becoming a way to pay for medical care not covered by medicare.
Also that excludes long term care, which can cost an additional $10,000 a month.
A quick comment on that: if you downsize, consider accessibility. As you age, you may not be able to deal with the stairs in a townhouse. We’re seriously thinking of moving to a condo in a few years - last year’s his-and-hers surgeries were, as one friend put it, a dry run for aging in place.
The advice you received seems on track to me.
I could live on 80% of our pre-retirement income without reducing our standard of living.
But I don’t have to. So I tend to spend 100% of our pre-retirement income. Mostly on more travel and more meals out.
The answer for us is what you would expect. Your goal should be 100% of your pre-retirement income. If you come up a little short, no problem. The travel will be less frequent, your charitable contributions will be less, etc. such that you can live within your means. Below about 75% and we would notice a pinch. I certainly would not be able to live on SS alone for instance. Living on just that would be a hot dogs and beans existence.
One reason we have decided not to move out of our house is that it is all one level, the only think approaching a stair is one step onto the porch and two from the garage to the house. East Coast houses typically have a lot more stairs.
We don’t have any problems, yet, but you never know.
Another thing to consider are state and local taxes. We live in an place where they are quite generous in giving seniors tax breaks.
For state income tax, they exclude a lot of retirement income including SS (which a few states do tax), pensions, etc. Plus the usual extra deduction for seniors. The net result for us is that we are nowhere close to paying any state income tax.
For property tax, thanks to our official “low” income, we pay no school taxes which is the lion’s share of our property taxes. Plus there’s a couple other breaks. So this comes out as chump change.
Since we don’t commute and drive our cars very little, they last a long time. Mine is 20 years old. The ad valorem tax for tag renewal is really small.
That mainly leaves sales tax. Groceries are tax free. Since we don’t drive much the tax on gas isn’t much. As seniors without kids, our demands for “stuff” is low. For a lot of other things we buy online which often has no sales tax and if it does it’s state only, no county sales tax.
For us, our monthly regular expenses are less than a third of our former income. Quite easily covered with a modest part of our retirement income. (And I’m not even taking my own SS yet.) There’s just the occasional big expense to cover. So our net worth continues to grow.
Any percentage like 70-80% of your pre-retirement income seems ridiculous to me if it doesn’t take into account the absolute value of your income and lifestyle. For really poor people it’s not enough. For upper-middle class and higher or middle class with modest needs, it’s way too much.
Did the financial planner happen to mention that plenty of retired people are quite content staying home, reading books from the library, and traveling only to see their children and grandchildren?
Medigap policies vary widely depending on where you live and they still don’t cover everything you might need.
For giggles, I once went to a price estimator site and plugged in two locations: our current area, and the location where my in-laws live (Palm Beach County, FL - a.k.a. God’s Waiting Room). The prices were something like double down in Florida compared to here.
Planning for retiree medical expenses is much on our minds - the in-laws had enough money from an inheritance to pay cash for a condo in Florida, and were loving it, until some bad decisions plus a devastating illness (MIL developed multiple myeloma) completely wiped out all their assets.
Most people my age or younger have no medical “safety net” in retirement, with fewer and fewer companies offering any kind of retiree health benefits. If you have sufficient cash flow to cover a very good Medigap policy, you may still get wiped out with the incidental expenses (as my in-laws did).
Honestly, we could downsize and probably do fine on 80% of our pre-retirement income. We couldn’t do it now, because we have a lot of other expenses (including paying for the in-laws to live; obviously we’re not eager for that expense to go away given the ramifications). Our house won’t be paid-off, but we could sell and move to a cheaper place locally, or to a cheaper part of the country. That all supposes we continue to work until age 65 and save more in the interim.
I actually looked at my Social Security benefits estimate the other day. took a WAG at what my husband’s would be (slightly less), and added up all our retirement accounts to figure what we’d get if we took 4% of it - and that added up to only about 60% of our current income. So we’re not quite there yet.
I have an annual chat with a planner at Fidelity. Every year, I say “So, just tell me when I have to die”.