FREE NEWSLETTER
THERE ARE TWO GREAT debates in retirement planning: whether the famous 4% rule is valid—and how much income folks need, relative to their final salary, to retire in comfort.
I find both subjects frustrating, in part because there’s so little consensus. I also find much of the advice way too complicated for the average American.
I participate in NewRetirement’s Facebook group and occasionally give my views on both topics. I recently expressed the opinion that the goal in retirement should be to replace 100% of the base income you earned immediately before retirement. I emphasize “immediately before” because that amount typically drives your current standard of living. Commenters said my 100% replacement rate is ridiculous—but those who disagreed suggested the right target should be everything from 30% to 120% of preretirement income. The thirty-percenters planned on moving to a farm. Most commenters supported 70% replacement.
Paying off a mortgage lowers living expenses, I was told. Those folks missed the point. Paying off that mortgage a few months before retiring is one thing. But if a couple pays off their mortgage several years before retirement, their spending has likely climbed, as they took advantage of the extra money available to them each month.
In making their case, some folks claimed living expenses will decrease significantly once retired. This was from people who were several years from retirement. Yes, expenses may change once you retire, but they probably won’t decrease and, even if they do initially, there’s still inflation to consider. Some spending may be eliminated, like commuting, work clothes and payroll taxes. Other costs, like health insurance premiums, will likely increase. My total premiums for health insurance, including Medicare, are five times higher than when I was working.
Moreover, once retired, chances are your discretionary spending will increase significantly, thanks to travel, hobbies, dining out, grandchildren and so on. Yup, these expenses are discretionary. But isn’t that what an enjoyable retirement is all about?
Other people commented that moving to a lower cost area would cut spending. If that’s the plan because you want to move, fine. But if moving is a necessity to get by in retirement, that’s another thing. It may mean your retirement savings can’t sustain the standard of living you really desire. In retirement, “frugal” isn’t a dirty word—unless you have no other choice.
Some folks seem obsessed with creating a retirement budget, going into great detail about every penny they expect to spend in retirement. Good luck with that. Certainly, having a good understanding of major living expenses is important, but there’s no need to stress over where every penny will go, which is impossible in any case.
One person asked me to outline my budget. When I said I didn’t have one, there was more criticism. “How do you know what you spend?” I was asked. You’re kidding, right? I can tell you exactly how much I spend each month.
I spend an amount equal to my net monthly pension and Social Security, except for any amount left in the bank at month’s end. Discretionary spending is automatically limited to what remains after all fixed expenses and credit card balances are paid in full. Someone may say, “That’s nice—you can afford to do that.”
But it’s not a matter of what we can afford to spend. Rather, what’s important is the amount we can’t afford to spend—otherwise known as living within our means. Once you know how much you can reasonably spend, the next question is, “Where does the money come from?”
I recently saw a Zoom discussion about retirement planning. The “expert” said to avoid the 4% rule at all costs. His reasoning: If you take just 4%, there would be a lot of money left over and you’d be needlessly deprived. How does he know that 4% means depriving yourself, when he doesn’t know your desired lifestyle or how big a portfolio that 4% draw is coming from?
A talk show advisor expressed a similar view. “Spend it down,” he said, noting that you earned that money, not your kids. But spend it down by what age? His crystal ball must be a heck of a lot better than mine. Allow me one of my favorite words: balderdash.
Here’s the deal:
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, he was a compensation and benefits executive. Follow Dick on Twitter @QuinnsComments and check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Good post!
I would suggest that number 6 should be adjusted for pensions and SS, though that can be a little tricky if one retires before SS and/or Medicare kick in. I do cash flow analysis to adjust for that, but that generally takes some background to do correctly.
I agree with 100% replacement. I would personally target 100% of expenses. For many, income may serve just as well. For others, it may way overstate their needs. My wife and I both just received substantial raises, which will go to savings. There is no reason for us to factor that into our retirement needs. I don’t think you can call out one approach as the best solution.
I strongly agree, however, that people shouldn’t count on expenses falling in retirement. I think it normally does, but often that’s only because it’s a forced reduction of expenses due to lower income. It’s not by choice.
enjoyed the article. But it feels a bit old school for today’s reality – many of us aren’t traditional w-2 workers with fixed salaries and annual raises from The Man. We’re contractors, freelancers, etc. Income varies based upon our billings and/or the economy, year to year.
“25x” all depends upon retirement age. Retiring in mid to late ’50s requires a different number than mid to late ’60s.
Many people should not rely on income as a barometer of retirement readiness – it’s all about a firm knowledge and handle on one’s expenses + enough for a very safe cushion for the unexpected ones, combined with the ability to adjust spending. i.e. – locked into as few fixed costs as possible.
JMO on a couple of things.
The 4% rule A nice rule, and nice for planning purposes – lousy to live by in retirement. If your return is better (or worse) your spending is likely to follow. Tax law changes, health cost changes etc. mean your spending may be more or less that the 4% rule allows.
What is needed in retirement. I think what is needed is to replace 100% of your spending. That should maintain your lifestyle. Can you spend more? Yes. Should you spend more? Maybe.If you have the money (and want to spend it) – spend it. If you want to have the money – save it. If you can’t maintain your spending you are likely to be unhappy with retirement.
Spending. After taxes, after retirement savings, after post tax savings, Other corrections for student loans, mortgages, supporting children, working/commuting costs etc. may not follow into retirement. While working they definitely do not add to your lifestyle. What is left is spent to maintain your lifestyle.
Taxes in retirement. For most people taxes are going to be significantly less than while working. FICA disappears. Older people get a bigger standard deduction. Social Security is tax advantaged (and tax free in some states). My total taxes in retirement have not yet hit 2% of my income.
Just some thoughts.
Thanks for another great post! I think the one part that I am struggling with is I know that there is no way I will need 100% of my income……but I will probably need 120%-150% of my take home pay. For my wife and I, we put $66k a year into our 401kIRAs. I know I don’t need to replicate that in retirement, so thats where the “income” part is a rub for me. I initially wanted to say I needed 100% of my take home pay, but that overlooks my FederalStatelocal taxes that are taken out.
The 150% of take home works for me, but would the average American understand 120%-150% of their take home? Probably not. I guess after all that I have to agree with you on 100% of income. It’s easy…digestable..and hopefully provides them a cushion that most will inevitably need.
I first began traveling the year before I retired. I got hooked and ended up spending over $20,000 a year on travel. As we got older, winter became less tolerable so we started renting a house in Florida for several weeks each winter. None of that was part of pre-retirement spending. My point is that it is not hard to need your full pre-retirement income during an enjoyable retirement.
We’ve been going back and forth for years about whether to get a second/vacation home. I think we’ve concluded that what we really want is to be away from our hometown in July and August (really, really hot) and maybe January (foggy and cold). So we’re planning to save and budget for VRBOs for a couple of months a year when we’re retired. Even if we spend $10K a month doing that, $20-30K/year is way cheaper and less work than owning a second home. And we’re not locked into the plan or a location if things change.
No cruises this year, Mr Quinn??!
Good discussion. Very practical. I agree with your seven points of advice.
I just wanted to say I love your name and picture! With Roscoe by our side we’ll get those Duke boys!
Sir – It seems to me the 3 financial topics we’ll never have a consensus on are (1) the most appropriate asset drawdown rate in retirement to enjoy life but not outlive our $$, (2) whether to keep a mortgage in retirement or pay it off earlier, and (3) should you take Soc Sec as early as possible or wait it out until 70. Too many folks like to generalize about this sort of thing (like Orman and Ramsey who are 2 of the worst financial “experts” ever).
I believe you are correct. And it’s all very confusing to people trying to figure it all out.
Why should you avoid the 4% rule? Many, many reasons. But the FIRST that comes to mind is yield on the 10 year Treasury as we speak is 1.094. What was the yield when Bengen came up with said “rule”. 5% or so?
End of discussion. Literally.
Start of the discussion really. Pick any easy guideline the average person can use to determine how much is safe to use of their assets each year?
Wrong. You are looking at nominal yields only. If you look at real yields (i.e. backing out inflation), bonds have often returned less than they do today. The 4% guideline is still a reasonable assumption. A couple who retired in 2000 with $1M using the 4% rule endured two awful market crashes and guess what? Still have pretty close to $1M ($982K I believe.)
I will note that rebalancing on a regular basis is critical to the success of the 4% guideline, much more impactful than during accumulation. That can be difficult to do when selling safe assets to buy risky assets that have only declined recently, but it still hasn’t failed in all these years.
Good discussion Richard. As for the 4% rule, it’s a discussion that seems to be a little too far out in the weeds for many people, so I’ll pass on that one. The level of income necessary to sustain (NOT just to start!) a comfortable retirement is a subject a lot more people can relate to, and one that seems to be very much misunderstood. Let’s face it–doing stuff costs, y’know, money, and just barely covering basic expenses month to month isn’t going to cut it for most people, no matter what age they are when they leave paid employment. So yeah, your goal of covering as close to 100% of spendable income before retirement seems a lot more realistic to me. And if you fall a little short of that, it’s not going to be nearly as disappointing as totally achieving success in replacing just 30% 🙂
For people who are not “experts” like you, there is a large benefit from an expert who can do the financial calculations that are so important for people to estimate income and spending needs and provide a list of questions they should ask themselves like what things they will no longer spend on and what things they want to spend on in the future as compared to the past. These calculations and the answers to the questions posed by the expert will pretty much determine what kind of retirement is possible. Someone in their mid or late sixties is not going to have too many options to change what will be the trajectory of their retirement. Llike a business, retirement spending is made up of fixed and variable spending. Fixed spending should be supported by things like SS, pensions, if available and immediate annuities where possible. The balance of fixed spending and variable spending is supported by retirement savings. Someone with only SS and some savings may need to invest perhaps less aggressively than someone with a pension. The 4% rule needs to be replaced by, at a minimum, some type of quasi-budget that is based on the assumptions derived from the “experts” analysis above.
But if the 4% rule or something like it does not provide an estimate of available income stream, how will a budget help? Any kind of budget can only work with adequate income not the other way around.
Many retirees do not have a pension and the median amount of net worth is about $150K without home equity. In my neighborhood retirees spend based on a budget that is contingent on SS and their savings. Too me it makes more sense to develop an appropriate withdrawal %(4% or otherwise) based on fixed and variable spending estimates, retiree savings available, and the best estimate of likely returns from the financial markets using an appropriate investor tolerance for risk. If spending estimates are higher than income estimates from SS and savings then you go back to review your income and savings estimates. This is an iterative process until both income and spending estimates become more in balance. Some of us live with a tighter budget than others. Everyone lives within a budget whether they admit it or not.
https://dqydj.com/net-worth-by-age-calculator-united-states/
Good post! But why should the income needed in retirement be even based on your income before retirement? It should be based on your spending before retirement to maintain your lifestyle, right? Plus or minus some adjustments for things that may change (i.e. more travel and hobby spending as you pointed out). Yes for many folks, the pre-retirement spending and income may be roughly the same, and then you’d be right. But it can also be vastly different. I.e. we spend just a fraction of our income each year. Do we need 100% of our income in retirement?
If a person earns $75,000 a year, their net is after all taxes. For most people retirement income will also be taxed. The elimination of payroll taxes will be offset by new expenses, probably health care coverage. I maintain saving should not go away for several reasons. Primarily to grow and maintain an emergency but also for added discretionary spending in retirement. I assume most people know their gross income better than they do their real net especially if they are heavy credit users.
+1
Exactly right. This type of thinking is so wrong today, when pensions are increasingly a thing of the past (except for some retirees in the public sector). Without the prospect of a pension, current workers need to completely change the “math” of retirement, and never spend anything like the amount they earn, whether it’s $70k per year, or $170k per year.
And when they stop working, they will need to shift gears dramatically, and adopt a mindset that permits them to withdraw from their savings/investment pool whatever amount is needed (and prudent) to support their retirement expenses.
It’s a new world out there, folks. We need to stop perpetuating these old ideas.
Not even half of Americans ever had a pension. So that is not the issue. The new math required is a lifelong goal of saving and investing and controlling spending and debt so that sufficient funds can be accumulated to maintain the same lifestyle in retirement. Why would anyone want a goal of living on a portion of their pre-retirement income? A lifestyle should be spread across a life, not two different lives. Spending will change in terms of how it’s used but that does mean it has to radically drop.
One thing I’ve decided is that it’s good to have some margin in your plans, and the ability to monitor and adjust your spending as circumstances change. Not micromanaging but maybe assessing things once a year. If you’re withdrawing 4% and it looks like the balance is declining too fast, do you have room to adjust your spending without big consequences? Or if things are looking good, you may need a sports car to take up the slack.
Far too many aren’t even saving for retirement which is tragic.
Aiming for replacing net pay is a good simple goal for many up through age ~50 and avoids tons of variables and uncertainty that surely holds back most people from even thinking about how to turn savings into income when work stops.
When will I want or need to retire? What will my final working income be? What will my SS income be? What kind of lifestyle do we want to afford if we’re able in retirement? How long will the last of us live and need income? What average return on retirement savings will we see? Can we afford to defer SS to boost that income? I was frozen like a deer in headlights by these questions until my late 40s, but saving enough I could double down and close the gap I saw after finally doing the math.
If by age 50 you’ve not even looked at whether you can match net pay with savings at your target retirement age, you may well have too little saved. Worrying about the 4% rule is likely a waste of time because you’re facing harder questions with few good options.
Bravo David! Yes, we live in this good ol USA and we do have choices.
In my 30s I started looking forward to what I would be in retirement. It was how I was raised as I was always taught to look ahead and prepare.
Much the success of what I did was to choose solid work that had a great exit feature. I was with the big phone company for over 30 years. They were known for their nice retirement benefits and so now I’ve been enjoying that for the last almost 20 years.
With the breakup of that system things were changing rapidly towards turmoil. Thank you big government. A few decades after that I left for another carrier and chose… mass transit. They also have a terrific retirement which I found could be maximized as it used highest yearly earnings and years of service to determine the pension.
I of course worked all the over time and holidays I could. A person could also sell back a portion of their available vacation to boost the yearly earnings, which I made the choice to do. Also at the end of my time, I was paid for 1/2 of the accrued sick time I had earned, which was the maximum allowed.
Just try to show that to the 30 year olds working at the same place…HA!
After only 16 years there, the pension from that enterprise is 175% of the one from the phone company.
I’ll be 70 in June of 2021 and so start Social Sec which will be also as maxed as it can be. Another choice. Then in 2022 I’ll turn on my two IRA distributions to add more income. I’ll have quite a bit more in retirement than when I worked.
In this country it’s not very difficult to retire rich.
I’ll have big amounts to pay the my Uncle though. But that ‘s proof of American prosperity…
Thanks big government!
A couple of minor points:
There is no conflict between the 4% rule and the advice “Spend it down”. The reasoning behind the 4% rule assumes that you do spend it down, meaning you spend principle as well as market gains.
The 4% rule doesn’t concern how much you will need to withdraw in retirement, just how much you can afford to withdraw without serious risk of running out of money in 30 or more years. Of course you need to estimate how much you will need to withdraw in order for the 4% rule to tell you anything interesting.
Exactly, it isn’t a straight-jacket, it’s a sanity check.
I’m sick of the 4% Rule and Financial advisors telling clients to save more. My advise is pay off your mortgage and live within what ever your income will allow. Early in retirement, you will want to do more. A younger person can do more. If you need (want) a new car, take the money out now and pay cash rather than financing it because the 4% rule says you cannot take out $50,000 this year. If you want to go on a big vacation or a lot of little trips, do it now when you are healthy enough to do it. You will never know when government will say you can’t travel again because someone is sick. You can cut back next year. Don’t try to be the wealthiest person in the nursing home when you are 90. I’m speaking form 28 years of retirement.
Hi ScubaSki, Agree scuba NOW. Since 2015 we scuba Big Island for 3 months each year. Renting a condo in Waikoloa makes Puko skin and scuba easy.
Hi Richard, I agree with your ideas and my life specific comments follow:
1. In retirement switch from SUPER SAVER to ENJOY LIFE SPENDER. No budgets. M = million
2. No
3. We provide with Joint survivor pension, SS at 70 and Large NUT, Wife SS at 62 spends freely.
4. No
5. No rules in retirement. RMD is the controlling factor making 4 % rule moot .
6. Retired 2015 each year we travel 3 months Hawaii, 3 months FLA, 3 months other travel and 3 months home. Since March 2020 home. Nut increased from 2 M to 3 M. So glad we spent 50 k per year traveling and enjoying life.
7. Since 1999 I did my own spreadsheets to plan and record good ideas. Spreadsheet says 3 M at 95 with 4% return. So Keep Smiling or as Evita would say “and the money keeps rolling in from every side”.
A corollary to:
4. Try not to end up as a financial burden to your children.
Your children shouldn’t expect an inheritance, but feel exceedingly fortunate if they get one.