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Retirement Riddles

Richard Quinn

I SPEND SIGNIFICANT time reading the viewpoints of people who are planning for retirement or who are already retired. My frequent reaction: What are they thinking?

When I review retirement planning discussions on Facebook and elsewhere, I often find the participants show little understanding of how to proceed or even what some basic terms mean. Here’s a sampling of the confusion and uncertainty I come across:

  • Should people aim to replace 70%, 80% or some other percentage of their preretirement income? And is that gross income or preretirement spending?
  • Is it okay to retire with just enough money to pay the bills and get by?
  • What is discretionary spending?
  • Do you need to keep a detailed retirement budget?
  • Does spending decline in retirement?
  • Is inflation a big deal for retirees?
  • Will seniors really spend $300,000 on health care in retirement?
  • How big a risk is longevity?
  • When should folks claim Social Security—at age 62, 70 or somewhere in between?
  • Are the days of saving money over once you retire?
  • Does the 4% rule still work? And how do you compute it?

Maybe the confusion isn’t surprising. You can find financial experts who will answer these questions in entirely different ways. My bigger worry: I see too many people who either overestimate or underestimate their retirement needs, or whose view of the future is either too pessimistic or too optimistic. How’s that for a definitive statement?

I try to be realistic about retirement—from my admittedly conservative financial point of view. My answers are opinions, though opinions based on decades of managing retiree benefits, conducting retirement planning programs and my own 12 years as a retiree. Still, they’re opinions nonetheless. With that caveat in mind, here are my answers to retirement’s thorniest questions:

Replace what? My advice: Aim for 100% replacement of your gross preretirement income. If you include Social Security, many people can already count on receiving 40% of their preretirement income. If you’re lucky, your employer may help fund part of the remaining 60%.

Frugal isn’t fun. Just getting by in retirement may be the reality for many people, but that shouldn’t be your goal. Do you really want to cut back your lifestyle? Do you want to live so close to the bone that an unexpected expense can wreak financial havoc? Aim higher.

Extras. Discretionary spending is what makes retirement enjoyable, so plan for it. Whatever you dream of doing is discretionary, whether it’s travel, hobbies, dining out or collecting stuff. Helping your children is discretionary, too.

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Forget budgeting. You probably already know what you spend on necessities, how much you save and your net income. What’s a budget going to tell you that you don’t already know? Just make sure you set aside enough money to pay off your credit cards in full every month—no exceptions.

Steady spending. Surveys say that spending declines later in retirement. I’ve been retired for 12 years now, and our spending hasn’t fallen. Stuff—expensive stuff—keeps happening, hence my advice to aim for 100% income replacement.

Inflation’s impact. Inflation is a big deal, but its effects vary by person. Are you renting? Do you drive a great deal? Are you looking to buy a house? Don’t forget that, despite the rhetoric, retired people don’t live on a fixed income. If nothing else, Social Security benefits increase with inflation. The 4% withdrawal strategy also assumes annual inflation increases.

Big bucks. Spending on health care varies widely from one retiree to the next, plus that $300,000 figure mostly represents years of Medicare and Medigap premiums. Forecast your property taxes or rental payments for the next 30 years, and you’ll get a big number for those, too.

Longevity. The longer you live, the longer you can expect to live. For a 65-year-old man today, life expectancy is age 84, while at age 75 it’s 87. Longevity means more inflation and more time for unexpected stuff to happen. It’s another good argument for starting retirement with excess income.

Social Security. Forget about the breakeven point. What do you care? You won’t be around to see if you won the Social Security maximization game. Take your benefits when you need the money the most. Remember, there are tax implications and survivor benefits to consider.

Save till you drop. I still save in retirement. Yes, it’s far less than before, but it’s enough to replenish the emergency fund and put something in our grandchildren’s 529 plans.

Four percent rule. It isn’t a rule, it’s a guideline. Search the literature, and you’ll find some say 4% is out of date and that it should now be 3.5% or less. Search further and some experts say retirees are shortchanging themselves and should take more. Nobody knows with 100% certainty, so I would err on the conservative side. If you’re wrong, you can always take out more money later in retirement.

Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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Richard Gore
Richard Gore
1 month ago

I don’t think it makes sense to base the timing of retirement on income level, but rather it should be based on spending levels. In many instances, income might be a reasonable proxy for spending, but spending is what matters. Some people live far below their income and if they have enough then why shouldn’t they retire. I think what you are saying is only too much is enough, but that only applies to ice cream.

Last edited 1 month ago by Richard Gore
rayanmiller6303
rayanmiller6303
2 months ago

I read alot of articles and now a few retires.
My take on the 4% is you might go less for a 30 or 40 year retirement but if you can get by with 25 years then you can go even higher.
Add a little bit of flex and you can go higher yet.

Ms. Liz
Ms. Liz
2 months ago

Dick, I normally find your articles to be super helpful. I think this one is too simplistic for the typical humbledollar reader.

I retired in 2016 at 51. During my last full year of work, I spent only 27% of my take home pay (from my job, not including investment returns). I had no debt and was uber focused on retiring so few expenses seemed worthwhile if they delayed my retirement date.

Had I needed to recreate the income from my job, I would still be working.

I created a detailed spreadsheet which showed my expected expenses over my remaining years. Some expenses went up (goodbye company car and good health insurance) while others went down (goodbye high tax bracket, convenience foods and work clothes). My spreadsheet has expenses grow at a higher rate than I expect Social Security to grow, variable investment returns and provisions for infrequent but large purchases like car replacements.

Each year, I compare my actual income, investment returns and spending to this plan to make sure I’m still on track.

Without those details as well as fallback plans for my fallback plans, it would have been really difficult to quit my job.

I’ve now worked with several friends who are nearing retirement age and they, universally, have a lot of anxiety about whether they have enough. Even when their financial advisor tells them they are good; even when they know they have millions coming in inheritance as well as millions invested, there is anxiety.

The only way I know to alleviate that anxiety is to lay out the details, stress test the investment returns and build in contingencies. So my husband and I build them a spreadsheet, show them how to populate and stress test it.

For those of us without pensions and with no guarantee of fully funded Social Security, I think we need more details to make sure we’re truly ready to retire.

R Quinn
R Quinn
1 month ago
Reply to  Ms. Liz

To be honest I think what you describe creates more stress. You can’t predict and test all those things with any accuracy during a retirement period. Retiring at 51 certainly is not typical either. You spent only 27% of take home pay, but were you paying all household expenses, you mention a husband.

Hey, if you think that level of detail is necessary and helpful, have fun, but it seems to me concentrating on building an income stream to meet as close the the target I suggest is all you really need. No matter what, your spending can’t exceed your income.

Brent Wilson
Brent Wilson
2 months ago
Reply to  Ms. Liz

I agree, 100% gross income replacement is not necessary at all. That’s especially true if you’ve been good about saving a large portion of your paychecks for retirement. Sure, if you’ve lived paycheck to paycheck your entire life, this rule of thumb might apply, but it’s hardly a good one for most HD readers.

Your retirement does not care about how much you used to make, it only cares about how much you have and how much you’ll spend. Nothing else matters.

Last edited 2 months ago by Brent Wilson
R Quinn
R Quinn
1 month ago
Reply to  Brent Wilson

You lived your entire life based on what you made in income less taxes and saving – hopefully.

Retirement is no different. Why target retirement assuming you will live as you want to on a far lower income? You may spend less on taxes, even savings, but those savings are easily replaced by other things, some necessary others highly discretionary. Why begin retirement with lower goals for spending?

parkslope
parkslope
2 months ago

Given the very different nature of spending in retirement, I think any guideline relative to pre-retirement income needs to be based on a comparison of typical pre- and post-retirement expenses. Otherwise, a guideline of 100% of gross preretirement income seems arbitrary.

I also assume that your “frugality” comment reflects your criticism of the FIRE folks. There are obviously many degrees of frugality and many of us don’t find that a moderate level of frugality limits our enjoyment of life.

Last edited 2 months ago by parkslope
Jackie
Jackie
2 months ago
Reply to  parkslope

parkslope – you are exactly right; each family’s situation needs to be evaluated.

  • I am 61 and my husband is 59, so we have a while before medicare kicks in. I need to add $2000/month in spending for health insurance/high deductibles and copays for our family once my husband leaves his job.
  • When we were both working, we earned enough to have a high savings rate. I can deduct savings from the monthly outflows for retirement projections.

That said, I do agree with being conservative. I have $3000/ month budgeted for large non-recurring items – fancy vacation, eventual car purchase, new roof, new furnace, braces for my daughter, eventual kitchen remodel…. It’s probably more than we will spend, but it will act as a cushion for any areas where I have underestimated spending.

R Quinn
R Quinn
2 months ago
Reply to  Jackie

My point of view would say how can one think of retirement at those ages – assuming it is voluntary. what percentage of your pre-retirement income would you say your retirement income is?

mytimetotravel
mytimetotravel
2 months ago
Reply to  R Quinn

Why would one not think of retirement at 60ish? I retired in 2000 at 53, and my pension was 40% of my final year salary. Even now I am drawing my own Social Security the combination is 70% of my final salary. I did part time contract work for four years, I drew a spousal SS benefit starting at 66, but although some years I spent a few thousand over my income and some years a few thousand under it averaged out and I still haven’t touched my portfolio. I will finally do so next year when I move to a CCRC.

R Quinn
R Quinn
2 months ago
Reply to  parkslope

Given the different nature of spending in retirement and the many variables with limited opportunity to increase income is exactly why I say target 100% of income, not spending.

What is the risk if I am wrong – extra money and what is the risk if the starting point is 70% of pre-retirement income?

Being frugal is fine, any level unless it is necessary to just “get by” as I hear so often. That can’t be fun and I feel for those who must live that way in retirement.

Richard Gore
Richard Gore
1 month ago
Reply to  R Quinn

The risk of retiring later is that you might be too old to enjoy the things you really want to do. I wanted to run marathons, but now find that when I have the time my body can’t stand up to the stress. That extra retirement savings is never going to get back those years.

parkslope
parkslope
2 months ago
Reply to  R Quinn

My comment reflects my assumption that you hope others find your recommendation more compelling than the 75%-85% of pre-retirement income typically recommended by financial advisors. Your response that you recommend 100% because of the many variables that affect spending in retirement implies that you don’t think financial advisors take that into account in making their recommendations. I personally think a stronger rationale is needed when competing against the conventional wisdom of financial planners.

David Powell
David Powell
2 months ago
Reply to  R Quinn

Richard, might it make more sense to target 100% of take-home pay plus any retirement-specific expenses and any ongoing savings which will continue? That’s an equation which will be more broadly applicable to a wider range of situations while landing on your goal of keeping the same living standard.

For example: those lucky enough to enjoy a high salary or salary+bonus, who pay taxes in a top bracket, and save a ton of after-tax $ for retirement, targeting 100% of gross income isn’t necessary to keep the same standard of living. For that person, taxes will likely be lower in retirement and the savings needed in retirement will be lower (though not zero).

R Quinn
R Quinn
2 months ago
Reply to  David Powell

David, I guess there are many ways to look at this. I try to keep it simple for the great majority of people who are very average.

For many, taxes may be lower – until they deal with RMDs, but even given that I believe my overall strategy works. HOWEVER, elsewhere i clarified the target is 100 percent of base pay. Not total compensation and also excluding OT.

‘’I’ve written about this so many times, just assumed, but should have been clearer.

parkslope
parkslope
2 months ago
Reply to  R Quinn

I’ve written about this so many times, just assumed, but should have been clearer.
Because HD continues to attract many new readers, I think it is always best to write stand-alone articles.

Ormode
Ormode
2 months ago

Saving while retired, that’s the way to go. You’ll never run out of money if your spending is less than your income.

Jackie
Jackie
2 months ago
Reply to  Ormode

Or. despite having substantial savings, you may never retire if you make saving in retirement a requirement.

Last edited 2 months ago by Jackie
R Quinn
R Quinn
2 months ago
Reply to  Jackie

Nothing is required, but rather desirable. No doubt you have heard about all the “struggling seniors” That can be mitigated by i lifelong eye on retirement, managing spending and focused on saving as a lifelong habit. All relative to ones income.

R Quinn
R Quinn
2 months ago
Reply to  Ormode

I include in savings a contribution each month to each of our grandchildren’s 529, adding to savings accounts used for emergencies, adding to investments ($200) each month and reinvesting all capital gains, interest and dividends until and unless they are needed as additional income.

mytimetotravel
mytimetotravel
2 months ago
Reply to  R Quinn

Again, that is your choice. Not everyone has kids, not everyone with kids has grandkids, not everyone with grandkids funds their education. Adding to emergency funds is only necessary if you have spent them.

Alan Schappe
Alan Schappe
2 months ago

I see that medical spending in retirement figure often and I think: yes, and my grocery bill will be about $325,000.00 over the next thirty years, plus inflation.

R Quinn
R Quinn
2 months ago
Reply to  Alan Schappe

My property taxes (not counting annually increases) will be $450,000 over thirty years.

mytimetotravel
mytimetotravel
2 months ago
Reply to  R Quinn

That’s your choice. That’s $15,000/year, mine have only recently inched over $3,000/year.

R Quinn
R Quinn
2 months ago
Reply to  mytimetotravel

A choice of where I live perhaps, but my family goes back to 1845 in the county where I live and all my family is within an hour’s drive, so we are not going anywhere. That’s another key factor in retirement planning-where one will live and much downsizing one is willing to do – having a choice is nice.

Kristine Hayes
Kristine Hayes
2 months ago
Reply to  mytimetotravel

We left a state where the property taxes on an 1100 square foot home on a city lot were close to $4000 a year. Now we pay $1100 a year for a 2000 square foot house on a lot twice the size of our old one.

R Quinn
R Quinn
2 months ago
Reply to  Kristine Hayes

Mine are about $15,000 and that’s for a 2000 sq condo. On the other hand my 2000 sf house on 1/3 acre in Mass is $2400 a year.

Philip Karp
Philip Karp
2 months ago

You left out the starting question about retiring: Why retire?
If someone is broken down by physical labor, then by all means and good luck to you!
But if you have a job that’s not physically punishing and the job carries full benefits with vacations and medical and drug coverage, then think seriously and logically about giving that job up.
Oh…you want to play golf a lot, or spend more time with your spouse, or do volunteer work, or you think you have enough money, or some other reason.
Well…think it thru better. Maybe your spouse doesn’t want to spend more time with you, maybe your health develops expensive problems to fix, maybe you get taken for granted doing volunteer work, maybe playing golf gets old after a while?

R Quinn
R Quinn
2 months ago
Reply to  Philip Karp

There surely is a lot more to retirement than money, but I don’t think simply staying on the job without some enjoyment or satisfaction is the way to go. When I was working I was in the office at 6:00 AM and usually left at 6:00 PM of so. Nobody told me to do that, I enjoyed my work and interaction with the unions and thousands of employees, but when in the last two years the environment changes and the enjoyment disappeared, I knew it was time to leave even though I had no plans for retirement. I never regretted that move.

Ormode
Ormode
2 months ago
Reply to  Philip Karp

Many of these lucrative jobs are quite disagreeable, Do you really want to spend more time in status meetings and budget reviews?
I worked at an absolutely ruthless corporation where the pay was very good, but the working conditions were pretty tough. Could you please take the 6 AM call with the India team before you come in? And oh, we need you on the 10 PM meeting with the Hong Kong security group. And the boss who was asking me to do this was even more stressed.

mytimetotravel
mytimetotravel
2 months ago

I disagree that you need a 100% of pre-retirement income. 100% of pre-retirement spending, perhaps (which for some people may be MORE than income). When I retired I paid off the remainder of my mortgage, and I stopped saving for retirement, which represented a significant amount. Since my income went down, my taxes also went down. I was able to travel extensively (if not at all extravagantly) for the first fifteen years of my retirement, before health issues, and now Covid stopped me. If I had waited to replace all of my salary I would have missed out on the travel.

I do agree that there is no reason to worry about the “break even” on Social Security. An inflation protected annuity is so desirable that if I knew I would drop dead tomorrow I still wouldn’t be upset about not breaking even .

R Quinn
R Quinn
2 months ago
Reply to  mytimetotravel

Paying off a mortgage immediately before retirement adds to the pool of available money for sure, but if the mortgage is paid several years before, I maintain the lifestyle accommodates that before retirement. Nevertheless, even reduced savings, and reduced taxes can easily be offset by new expenses necessary or desired.

There are many possible variables over a thirty or so year period. If one can achieve 100% replacement there is more flexibility and less stress over unforeseen spending and occurrences,

It’s easier to say pre-retirement income because that is known for everyone as opposed the pre-retirement spending which is highly variable.

mytimetotravel
mytimetotravel
2 months ago
Reply to  R Quinn

I have been retired for twenty years. My expenditure has yet to reach my pre-retirement income. Clearly, I didn’t need to continue to work, and I would have missed out on fifteen years of travel if I had done so. The fact that spending is variable is why people need at least an outline budget.

R Quinn
R Quinn
2 months ago
Reply to  mytimetotravel

If spending is variable – and it surely is – how will a budget help since a budget typically is not variable. Would you have forgone a nice trip if it were not in the budget? Like me, you don’t sound like the typical retiree.

mytimetotravel
mytimetotravel
2 months ago
Reply to  R Quinn

By variable I meant that my spending is different to your spending, not that my basic living costs changed post-retirement – although they will change next year when I move to a CCRC, and I had a fee-for-service financial planner run the numbers for me because of it. Discretionary spending may certainly vary, but it is discretionary, and can be foregone if necessary.

Jerry Pinkard
Jerry Pinkard
2 months ago

Well done Richard. A good summary of key issues for retirees. I agree there is a lot of confusion over these. Prospective retirees should spend some time educating themselves on retirement planning, even if they use a financial advisor.

Jerry Pinkard
Jerry Pinkard
2 months ago
Reply to  Jerry Pinkard

FWIW, we are spending less 11 years into retirement. Some of that is due to pandemic and less travel. Some due to health issues that have slowed us down. I have a company sponsored health plan with prescriptions that is fully paid for. It is better than anything in the marketplace and I have very little health care cost except wife is on medigap plan and prescription plan. The one health issue that has hit us and probably other seniors is expensive dental work.

R Quinn
R Quinn
2 months ago
Reply to  Jerry Pinkard

I had such a health plan as well until the company decided to take it away last year and replace it will an HRA contribution that will not keep up with inflation and caused many of my fellow retirees to incur hundreds of dollar in new Rx costs each month because they had to now select a Part D plan.

Jackson Patterson
Jackson Patterson
2 months ago

Some great advice there Richard! We created a budget and reduced spending BEFORE we retired, wonder how anyone could REALLY know their spending and income without doing that.
And there’s a BIG difference between being frugal and just getting by. My wife and I travel every month of the year but we don’t go on cruises or stay at all inclusives like we did in our working days. Retirement itself is so luxurious that we seek out other things when we “vacation”.

R Quinn
R Quinn
2 months ago

In answer to your question, knowing your spending is very simple. Take your net income after taxes, subtract all saving and what is left is your spending – assuming a person is not living on credit card debt above their means. What else could spending be?

The Frugalwoods blog says unless you know all you spending and have a detailed budget, you can’t possible set savings goals. I say that is absolutely backwards. Savings always come first and then spending is automatically limited to what’s affordable.

If your definition of travel makes you happy, great. But my point is a retirement that allowed you to take cruises is the goal, if you desired to.

Michael1
Michael1
2 months ago
Reply to  R Quinn

Lots of good advice in the article.

While a budget may not be a must, I think a spending projection is very much one, and it may be different than working income minus savings and taxes. That’s a useful figure, but calling that a spending projection assumes we stay in the same town (or cheaper), in the same house (or cheaper), and don’t travel, eat out, or gift, or ? more than while working. It also doesn’t account for other changes like the employer share of health care premiums going away.

I agree that current spending is a good place to start, but not good enough in my opinion. There needs to be some effort, even if not super detailed, at determining what a portfolio is going to have to pay for over time to be able to say (1) if it’s adequate or not, and (2) what kind of risk should or shouldn’t be taken with it.

It may be that the advice to replace 100% of gross working income while only planning to spend that amount minus taxes and savings is meant to provide a planning cushion. Is it enough of one? If we don’t expect our life to change much, probably. Otherwise, we should actually think about how we plan to live and do a little math.

R Quinn
R Quinn
2 months ago
Reply to  Michael1

I agree that you need an estimate of your spending in retirement as there is no other way to align the sources of income. There may be a few outliers that will change upon retirement, but for most people the estimated income will determine the available spending.

Michael1
Michael1
2 months ago
Reply to  R Quinn

That’s one way to look at it. The other is to determine what we anticipate (or would like) our in-retirement spending to be, and then aim for a portfolio/income stream amount to support that over time. This requires some thought and some math.

Using x % of working income still deserves some too, especially if we intend a significant lifestyle change beyond simply not working.

David Sayler
David Sayler
2 months ago

I am also amazed at some of the questions asked in Facebook groups on both taxes and retirement. I try to keep an open mind that everybody has to learn from someplace, but I’m not sure I’d take advice from a bunch of strangers on-line.

Paula Karabelias
Paula Karabelias
2 months ago
Reply to  David Sayler

As the old saying goes, Trust but verify.

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