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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 us, it wasn’t replacing any specific % of working income, it was when our income streams would more than cover our expenses (yes, calculated with a … spreadsheet) and also allow us to continue to save each month. Our pensions have a COLA which has more than kept up with Medicare and other increased costs. My wife started receiving social security in February and all that goes into savings. So, we don’t anticipate needing to tap into our T-IRA, Roth IRA’s, or savings accounts in order to pay monthly bills. While I hope that our politicians do something positive to save social security with no benefits reduction, even if reduced benefits happen it won’t interfere with our retirement lifestyle.
Many articles discuss what percentage of income to replace. This may be useful when looking at large groups of households. But the percentage of gross income actually spent prior to retirement may vary considerably among different households. A more individualized approach is better.
I agree with you on not focusing on total income per se, but on that portion of income you actually spend. I accumulated enough to provide the cash to continue spending as before. Whatever percentage of my pre-retirement income that amount may be can be derived. And, in addition to annual inflationary adjustment in spending, don’t forget hedonic adjustment. A rough proxy for this is the annual Real GDP growth percentage. Jonathan among others discussed this.
These are ideal goals to shoot for but not everyone may achieve this. Some will need to downshift their spending in retirement. But aiming for a goal, and coming up short is preferable to not having a goal at all.
I targeted 100% of my base salary, not total income because we did not live on total compensation. Our lifestyle was salary only.
You are right many will not be able to achieve such a goal, but still a valid quest because the alternative is what millions of seniors are now dealing with – cutting back because of prices, complaining about increasing property taxes as if that wasn’t to be expected as the cost of what local taxes pay for goes up as well.
If a person is age 50 they surely see the impact of inflation in various forms from prices to taxes.
Why would anyone retire and not realize none of that will change in the years ahead? All prices and at least property taxes will steadily increase over the years.
In our case I have been collecting a pension for 18 years with no COLA, but the pension plus our combined SS has provided a comfortable cushion against inflation. A suspect at some point that will no longer be true, but that’s where investment income can pick up the slack.
Even folks living on only investments might want to consider of pool of funds designated only to offset future price increases separate from the investment pool generating current income.
For people who retired in their 50s or early 60s the challenge is likely greater because of the time factor.