FREE NEWSLETTER
With all that’s going on with SS (COLA, taxation, potential cuts) and some changes certain in the next six years, is it time to rethink the income replacement percentage you shoot for in retirement?
I won’t give my theory again, one or more of the Clements family will be upset with me😅
However, self preservation, a hedge against longevity, hence inflation and peace of mind still tells me that a goal of replacing 60, 70 or 80% of pre retirement income is not sufficient.
Pssst … it’s 100% of the income you were actually living on day to day before you retired. Trust me it’s comforting.
For my estimates the 80% of my pre retirement salary made sense: no longer incurring payroll taxes (7.65%), no state & city income taxes (approx 6.57%) on SS & pension, city income taxes were wages only, not contributing +15% of salary to 401k plan.
I ignored commuting/other work costs and simply viewed the above as reasonable approach to an 80% estimated need of pre retirement salary. Hard to argue with the math. Silly to bang the drum about 100%.
I realize the math as you noted says you need less than 100%. I also realize that many – most – people do not have 100% replacement, but that does not make it a less desirable goal.
Starting off at 80% leaves little room for error IMO. It also means there better be a solid plan to deal with inflation in the years ahead as that 80% value steadily declines. My 100% in 2010 sure isn’t the same in 2026.
Duly noted. Your ‘inflation beware’ advisement is duly noted.Thanks!
Inflation muddles the mind. Using less than 4% of total portfolio value yields greater than 100% of former salary is another math point, but it’s all inflated dollars.
Almost nothing engenders more thoughtful comment than a post by Mr. Quinn regarding post retirement income equalling 100% of your last paycheck. I say the more the merrier, however, I find my expenses much lower in retirement than during my working days. I had retirement thrust on me when I was 59, by Covid, and I’ve chosen not to go back to work since. My youngest, our 4th, also graduated from college in 2020. From that point going forward, I no longer had 6 cars, my car insurance was reduced by 75%, my phone bill similar, I paid off my mortgage, many other expenses reduced or disappeared, and so I wouldn’t need 100% of my income at retirement to get by. Interestingly, rather than looking to downsize, I really need to upsize. With two children now married, we need more room rather than less for large family gatherings. So much of these needs, rules of thumb, etc. depend on your personal circumstances and the timing of any children in your lives. But having 100% of your last paycheck in retirement would be a very good thing if you can do it because of the flexibility it would provide.