Generating a reliable source of income is one of the most important, and often challenging, parts of a successful retirement. Those of us fortunate enough to have a decent defined benefit pension have a leg up on this. Combine this with an inflation protected social security benefit, and some savings, and a retiree has a chance at a modest, yet comfortable retirement. I’ve seen this firsthand. My in-laws were a truck driver and a part-time registered nurse. They combined a teamster’s pension, a small nursing pension, and 2 social security benefits, along with a 403b plan, and lived a comfortable retirement.
One of HD’s most esteemed authors frequently advocates for a retirement income goal of 100% base pay replacement in retirement. This was repeated recently in this post. There have been lively discussions on this site about this in the past. I’ve wondered if one of the sources of disagreement in the past was the use of the term “base pay”, but I’ve never seen it discussed. Today’s post resurrected that thought, and I think it may be worth exploring. Here are a few questions that I have.
- In my working career, most professional’s salary was the same as their base pay. At one point I managed more than 500 engineers and scientists, and had access to the payroll data for 1000s of employees. The vast majority worked for a salary, with occasional bonuses or awards. But they were small in comparison to the salary. In my experience, base pay and pay are the same thing. I’m aware of industries – finance, tech start-ups, sales – where pay is tied to business performance. In my companies that was limited to the executive level. What is the experience of others? RDQ has told us he worked for a large utility. Were bonuses a significant part of the compensation for the majority of employees?
- How do you define base pay for a couple with both working? My wife was able to work part-time as a nurse while our children were growing, and transitioned to full-time as they finished high school and went to college. She progressed well in her career and her last 15 years she developed and managed multiple surgery centers. Her salary increased with her added responsibility, and helped us pay for college, purchase a beach home, and save significantly towards retirement. In the last decade of work, we were able to max out retirement account contributions and save beyond that. Should you replace the income amounts that were directed to qualified retirement savings accounts while working?
- Consider the new retiree in the table below. She retired form her position on 12/31/2024. She has no pension, but saved diligently in her employer’s 401k, an after-tax savings account, and a Roth IRA. How should she set up her income plan starting Jan 1, 2025?
| Item | Data |
| Facts | |
| Personal | Female, single |
| DOB | Jan 15, 1960 |
| Retire | Dec 31, 2024 |
| Residence | PA |
| 2024 Income | |
| Salary | $100,000 |
| 401k Savings | $30,500 |
| HSA Savings | $5,150 |
| Payroll Tax | $7,650 |
| Federal Tax | $5,669 |
| State Tax | $3,000 |
| Net Pay | $48,031 |
| Assets | |
| 401k Balance | $1,200,000 |
| After-tax Cash | $100,000 |
| Roth IRA | $200,000 |
| SS Benefits | Monthly Benefit |
| 65 (1/15/25) | $2,115 |
| 67 (1/15/27) | $2,558 |
| 70 (1/15/30) | $3,038 |
Did you just log in? If you don't see the commenting form, please refresh the page.
Someone with this balance sheet can probably easily enter retirement, but with a caveat. There is no disclosure of debt or budgeted (and unbudgeted) spending habits. Big mortgage? Country club? Expensive cars? Lots of discretionary spending? That could make a difference.
I wasn’t completely sure myself that I had enough when I retired, but I knew I was a hard conservative about money. What sealed it for me was watching my “flow” over the last two years of working, i.e., how my spending rose and fell each month. I did the same thing after I retired. I found that there was only a small difference, and I could “smooth” my income and expenditures easily, even without having a paycheck. My 401(k) and SEP, plus social security, were easily enough to do what I wanted to do. I didn’t really have to dip into my core retirement accounts at all. The biggest expense? Taxes!
Well done! 👍 with 1.2 million I would (and did) retired early. With that as her nest egg and social security at 65 she can easily have her gross income in retirement and enjoy annual COLA’s as well. And if her husband has the same or even more available good for them both. Enjoy the fruits of your labor. They’ll still be plenty left to pass on to your heirs.
I retired three years ago. A couple of years before retiring I thought about how much I needed to retire. I came to conclusion I needed to replace my take home pay, not my gross. By taking a pension instead of a lump sum and waiting until my full social security age I was able to replace 95% of my take home pay which is what you really live on.
It worked because when retired you’re no longer paying SS taxes, my state, Wisconsin, doesn’t tax SS benefits, and federal taxes are lower also.
I was lucky to have a pension option but for people who don’t things are different.
Good question. Although we all think expenses go down after we retire, that rarely happens to most of us. In my situation, I needed pretty much the same income. If you want to be sure for your retirement, I would project whatever your average AGI was for the last five years, shoot for that average per year. Better to be a little higher than not enough. In my own personal situation, I spend more now in retirement than ever before, mostly because I live in a CCRC Independent living. A real nice, to have, if you can.
I think the 100% replacement question depends on certain factors. If one is only making ends meet while working, upon retiring they may need the same amount of income. The question is, if they are just making ends meet, will they have much saved for retirement. Most do not have pensions now so SS may be their only income, along with savings if any exist. Getting 100% of working income is great and not too many would say they do not want that if they could get it. But those making more money than they need while working might not need that same level of income when retired. Unless they want to live very high on the hog, as they say. In which case, they probably have the investments to do that. Retirees will have no retirement plan contributions, SS and Medicare contributions from income, etc. Some may have paid off mortgages, won’t have commuting and parking expenses, dry cleaning bills, and so on. The high earner, unless they spent all their earnings and did not save, should not need 100% of working income to get by. My wife was a stay at home mom with 4 kids. Quit work after the 2nd one came. We were fortunate that I worked in a sales related field where income varied every year, but it paid well. We have no pensions, and our retirement income comes from SS and our investments. Our expenses are not anywhere near what my income was when working, so 100% of my income is not needed. So the question of what percent of income does one needs depends on many factors, and is a good question for all to look into when doing retirement planning.
Hopefully, the new retiree enjoyed her work, and started doing some of those things she always dreamed of long ago … instead of waiting to do them in retirement, as she is now age 65.
What is her marital status? If she is married, does the spouse have comparable financial status – less, more? That is important if only because of the spouse’s benefit and surviving spouse’s benefit from Social Security.
Does she have legacy goals in mind – perhaps gifts she wasn’t prepared to make prior to retirement. If so, I would not wait until death to make those gifts, but incorporate them in year after year spending objectives.
Unclear what her health status is, or what her anticipated medical spending will be. No mention of Health Savings Accounts. No mention regarding any post-retirement health coverage from her employer – the 401k balance suggests 25 or more years of service/participation (unless there were substantial rollovers into the plan). Even if there isn’t an employer-sponsored plan, Medicare Advantage options offer superior value at a modest cost to those who retire in good health.
I assert that it is all about replacing 100% of regular, everyday, anticipated spending. No information about liabilities. So, while her take home was $48,031, would need to know whether she was spending all of that, less than that, or limiting her spending to include every dollar that came home. Assuming no debts, and home ownership, the cash savings suggests she may have been spending less than 100% of her take home.
Given her savings, I suspect she was effectively managing everything else. I would still ask. So, my guidance would be to ensure that she had sufficient, guaranteed, inflation-indexed income to match 100% of her regular, everyday, anticipated spending.
That is, I would bridge to the age 70 Social Security benefit – treating it on the same basis as if it were an annuity purchase. I would encourage her to consider a QLAC, and gap fill by spending 401k assets, first to age 70 (about $225,000), and then to age 85 (another $250,000 or so until QLAC commences). With respect to sequence of returns risk, I would consider a five year bond ladder with TIPS, MYGA, or a HECM to age 70 – unless her 401k, like my 401k, allowes a participant to initiate a plan loan after separation from service. If her 401k allowed such loans, I would leverage that to prepare for sequence of return risks – adjusting investment allocations as necessary so that the plan loan principal becomes part of the fixed income allocation – what plan loan principal actually is.
Finally, almost all of us who survive through our 80’s, slow down and slow our spending as well – the retirement income “smile”.
Excellent analysis. Agree with almost all of it. (I understand you are looking at MA mainly from a financial standpoint, but it’s a suboptimal choice for many people, including healthy people so I would have left that out.)
“Medicare Advantage options offer superior value at a modest cost to those who retire in good health.”. No. Generally your choice of doctors is restricted and you may need prior approval for procedures, which may be refused. Once your health declines you will be unable to transfer to a Medigap plan because you will fail underwriting.
I echo Parkslope:
My wife and I have been enrolled in the publicly-available Orange County, CA Kaiser Permanente Senior Advantage Plan (Medicare Advantage) and it is truly WONDERFUL!
I feel very lucky indeed that this wonderful plan, offered by a wonderful non-profit company, is available to us.
I think this company and plan could be THE model for a “Medicare for all” (universal health care) plan for America!
I believe Kaiser, not available in my area, to be the exception that proves the rule.
We’ve been enrolled for 11 & 15 years, respectively.
While I realize this is frequently the case, we have had no problems with our MA plan. My wife and I have been enrolled in Aetna Medicare Advantage ESA PPO since we retired 6 years ago because it is paid for by her NYC retiree benefit plan. We have yet to have any difficulty finding doctors or obtaining approval for procedures, including two that cost more than 100k. This includes the four years we lived in Raleigh (providers affiiated with Duke and UNC) and the two years since we moved back to the NYC area in 2023 (Columbia-NY Presbyterian, Mt. Sinai, Montefiore and NYU).
People with UH MA plans came within a few days of losing access to Duke this year. They were advised to find new doctors. Last year it was UNC. But the real issues show up when you have an “unusual” medical problem, or just a lot of them. I was fortunate that I was able to have my rare eye disease treated at Duke, but if I had lived in Asheville instead of the Triangle area I would have had to travel out of network for the latest treatment. In the early 2010s I would have had to travel out of state.
Thanks everyone for some really interesting discussions, especially the ideas for the case study SF She has done a nice job saving for retirement, and has some good options for funding a comfortable retirement. I think she would be a good candidate to consult with a good holistic financial planner and evaluate in one of the higher end financial planning tools – like MaxiFi or Boldin – to set up a good plan going forward. She has a lot of options, and the better the decisions she makes now will help her for the next decades.
One point of interest – I ran her case through Mike Piper’s Open SS tool. The tool did not recommend she delay SS until 70. Its base recommendation was to file at 68 and 2 months for a lifetime benefit of $404,532. Using the Non-smoker super-preferred mortality table the tool recommended she file at 69 and 4 months for a lifetime benefit of $478,852.
Nice additional information, Rick, which points out the importance of longevity in financial planning. It reminds me of friend’s grandparents. Good genetics, along with wholesome living among the Illinois cornfields helped each of them live past age 100. They ran out of money and had to rely on support from family.
My professional experience was in the government contractor and later federal employment space. In neither were bonus amounts significant for the typical professional employee, although it was a larger part of the compensation package for executive level management in the government contractor environment.
For my wife and I as we prepared for retirement in 2018, we focused on expenses and cash flow. Once we had sufficient cash flow (with a nice buffer) then retirement was an option. We didn’t look at % of base pay at all. While we do some short term savings for various purposes, we no longer do any long term savings from our monthly cash flow. However, we do manage out investments to continue to participate in growth, but that’s not out of our monthly cash flow. So far it’s worked out well for us.
As regards your case example, I’d probably suggest she hold off on drawing social security and use a combination of her other assets to minimize taxes while supporting herself until 70. That cola income is hard to beat.
Thanks for reading and commenting, It I’m glad your retirement cash flow plan is working well. I think your assessment of the case study is a very reasonable suggestion.
Interesting article, Rick. I was aware of various suggested percentages of income replacement recommended for retirement in the literature. While I found that useful as a rough guide, I used a different method. I tracked my after-tax cash usage for over five years prior to retiring. This included not only spending but also that put into “mini-escrow” accounts earmarked for future needs, such as new car purchases, unpredictable large out-of pocket expenditures for home maintenance, remodeling and repairs, and a discretionary account. I assumed that as a first approximation, my annual cash flow needs would remain unchanged once retired. My retirement would be funded by SSA, our 401-k accounts rolled into IRAs, and our taxable brokerage account.
A little calculating revealed how much annual gross income I’d need in order to provide this desired after-tax cash flow. As Bill Bernstein has written, the two most important factors which determine our probability of success during the distribution phase are the burn rate and time horizon. I chose a 30 year horizon at age 65, and a burn rate of 3%. Now at 72, I still use a 30 year year horizon, as a margin of safety.
I could easily divide my current MAGI by the amount I earned while working, adjusted for inflation, to yield a percentage. But for myself, I found my method to be more useful. To each his or her own.
Jack, we took the same approach. We paid no attention to the guidelines to replace X% of pre-retirement income, or salary, or whatever. Rather, we looked at what we were currently spending while working, estimated how that would change in retirement, and estimated what portfolio would be required to produce it, with a buffer for safety.
Did that estimated annual expenses plus margin of safety amount equal a certain percent of salary? Mathematically, sure it did, but that does not mean “We estimated that we needed __ percent of salary.” No, we estimated that we needed ___ dollars. We didn’t care what the corresponding % of salary was, because it didn’t matter. Still doesn’t.
I agree completely. It’s also what my wife and I did as well. So far it’s worked as planned.
Wish I could up-vote this more than once.
So, if your cash flow needs would remain unchanged after retirement, aren’t you then saying you indirectly targeted 100% replacement from all sources? And if that is the case, was all your tracking work truly necessary?
Do you still feel the past five years were a good indicator of the years after retirement?
The retirement literature I was familiar with suggested replacing some percentage of pre-retirement income to allow for continuing with the same standard of living, once retired. I thought my method would reveal a more realistic number.
I replaced 100% of my annual cash expenditures, and I did take into account the value of any employer provided perks which would vanish. I had been making annual increases for both inflation and hedonic adjustment for years before retiring, and have continued for these past 7 years in retirement.
I did not find it difficult or too time consuming to do this. While we spend proportionately more on some things, less on others, our total annual spending has remained roughly similar, after adjusting.
And yes, those five years’ worth of spending, adjusted as described, did provide a reasonable predictor of what we would spend in retirement. Or, what we would be allowed to spend based on my plan. So far, no complaints.
Jack, thanks for reading and an interesting comment. I hope you get to see the end of your time horizon, with ample margin of safety.
Thanks.
I think the theory of replacement rate of salary for retirement is arbitrary. It’s dependent on so many variables that it could be re-stated as “more is better” (and who would argue with that).
I suspect it was concocted by the Fin Serv industry as every one of their calculators always seems to say you need to buy more ETFs or mutual funds.
Certainly in our working lives more income is better. In retirement, I think it’s worthwhile to think about how you are generating your yearly cash flow. If you are converting tax-efficient assets into taxable income, and then saving the portion that is in excess over your expenses, that may not be the best choice. It’s like moving savings from one place to another, but paying a cost to do so. I agree it is complicated and dependent on many variables, but it is worth considering.
Great point.
Aren’t the cash flow needed and how it is generated, two very different things? Of course, tax free is always nice.
Of course they are different. The point is if you need $50,000 per year to pay the bills, but you generate $100,000 in taxable income, just to have margin, you are paying taxes on $50,000 of unneeded (that year) income.
Without knowing her expenses, I’m going to assume that she’s spending everything of the $48k (as this is in my mind a worst case scenario)
So she’s at $4k/month, with $1.5M invested, my quick math says she’s at a safe $60k/yr on her nest egg, that’ll generate federal taxes $8,177, $51,823, so more than her bottom line of $48k.
BUT she’s about to have Medicare premiums taken out, perhaps if she can’t afford it, go Med Advantage, but I wouldn’t hesitate to go up in withdrawals a few thousand, to do trad MCR with a supplement.
Now why am I comfy with this, simple, let’s say the market tanks and at 70 she’s only got $500k in investments left. That will generate $20k per year and her SS will then generate $36k per year. Total 56k/yr a raise from the $51k she started with.
Now there are few 5 year periods where your portfolio is going to dwindle by 2/3s, so it’s a back stopped bet on equities.
But it’s an annual consideration. If you start out year 1 and you want to travel a bit, spend maybe 5%, so there’s a couple of nice trips. End of the year if the portfolio is healthy, you can do another 5% stick with the plan.
BUT if there’s been a big decline, maybe you pull the trigger on that SS to lighten the withdrawal burden and have some peace of mind.
But that’s what I’d do, try to delay and decide. No need to start the SS until you need to. (And I’d encourage a 60-40 or 50-50 portfolio to start, better to protect the downside short term, to likely lengthen the delay to SS, once SS starts, I’d reconsider the amount of equities, to reflect the new realities)
“BUT if there’s been a big decline, maybe you pull the trigger on that SS to lighten the withdrawal burden and have some peace of mind.”
This is what I have written is our plan, although I would not wait until there was a 2/3 drop. I have targeted a 20% drop in our portfolio. If this occurs the we would claim her lower Social Security benefits to decrease our portfolio withdrawls, and if still necessary cut back on our spending. I would still wait until I turn 70 in 2 1/2 years to claim my Social Security benefits.
I don’t think this scenario is likely as our portfolio is 45% equities, 45% bonds (all short term, and 50% tips), and 10% cash.
What is your thinking on cutting back on spending in favor of delaying SS? They would be 2-1/2 years of lifestyle cut back in your best years for a gain of say 20% on your SS benefit in the future?
Scott, thanks for a great analysis. I think she’s in good shape, with a bunch of options as you discuss.
I think it is time to play my broken record again. Just my opinion, but the discussion of “income” in retirement planning is meaningless. People don’t need income, they need cash to pay their expenses in retirement. To do this planning, you need to know what your actual expenses might be so that you can figure out where you will get the cash to cover them. Once you know how much cash you need, you can then look at your options to decide the most tax efficient way to fund your need. Cash can come from the amount remaining after paying income tax on 401k withdrawals, or the net of the same calculation on SS or pensions, or from withdrawals from Roth accounts, taxable accounts etc., or sale of capital assets from a taxable account.
For those without pensions, every new year that approaches requires another cash flow plan. That is how I have to do it every year. Wishing for pensions or their equivalent is a waste of time. Most don’t have them and/or won’t buy them. And, federal taxes are complicated. Even if you begin your retirement with a pension, after ten years inflation will have eroded your “reliable income” forcing you to do cash flow planning. This is why most folks need at least one visit with a financial planner to show them the thought process necessary to do this.
And doesn’t all that, especially for those with a pension or fixed annuity mean you are better off with the higher percentage of income you replace at retirement and assuming no significant overall decrease in spending?
One exception may be paying off a mortgage upon retirement, but then you are left with property taxes and insurance. The other is reduced savings, but most people aren’t even saving 10% let alone the outliers of 30-40%
When the need comes we will use dividends and interest to boost income in our own form of COLA or in the extreme dip into investments.
You are like a tradesman whose only tool is a hammer so everything defacto becomes a nail to fix.
You don’t acknowledge the linkage but your dividends and interest (and plausibly investment growth) are forms of income, just not under your specific personal definition. And dipping into investments is not an extreme action – for most people it is what that investment capital will be there for. Not to be drawn down and blown in one go but certainly part of a plan to spend it as needed over a remaining lifetime.
I’d also add that “income” may not be tax efficient if it is unneeded. It’s a rather blunt tool. Sure once and if you hit RMDs then this might become more moot but I think I’d rather see investments rolling up tax free to be taxed by my election on drawdown rather than automatically paying tax on excess income then holding in non tax sheltered vehicles e.g. general brokerage account.
I read this a couple of times, but not sure what you are saying.
Of course dividends and interest are income. Should I have said spendable income?
I think I acknowledged income, but for now ours is being reinvested and 90% of the interest is and will remain tax free.
I’ve been in RMDs for ten years even though I wish I weren’t. We pay the tax, give some to charity, some to our children and reinvest what is left. Still income.
i certainly know using assets is the common source of income and necessary, but because of our pension, if we got to that point it would be extreme.
Thanks for reading and commenting. You make a rational and coherent argument. I’ve had similar conversations, using the word money instead of cash. For better or worse, the financial planning industry uses the term retirement income. And people are used to regular income.
Your description of a yearly cash flow plan is exactly how I set up my wife’s aunt and my mother-in-law’s plans. It’s how I run our plan.
There seems to be a psychological impediment to spending hard won assets in retirement, even though that’s why many of us have saved.
Cashflow is entirely the logical way to think about it. Money is ultimately fungible – if I have $1m at the end of a period and need $50k in the next year it doesn’t matter whether my $1m grows by 5% interest and dividends or 5% marked to market valuation which I liquidate it provides just the same.
And it amazes me how many people fail to grasp that a $1m cum div value is exactly the same a $950k ex div plus a 50k div as soon as the div is paid. People sometimes seem to behave as if the 50k div is somehow “free money”.
And you may pay less tax on the liquidation than the interest and dividends.
The megacorp I worked for didn’t pay non-executive employees bonuses until three years before I retired. They were tied to performance but not large – maybe 5% for top performers the first year and smaller after that. As I’ve posted before, my pension was 40% of my final salary, and after allowing for paying off my mortgage, no longer saving for retirement and seeing my taxes nose dive, that was what I was living on.
What matters is how much you spend, not how much you make. After all, some people manage to spend more than they make.
Kathy, thanks for reading and commenting. At my megacorp(s) any substantial bonuses were also largely reserved for executive level employees.
Bonuses were always a part of my compensation structure, often reaching 20% of salary or more. The 100% base pay replacement target is a meaningless metric to me. Assuming my monthly pension and our two (future) SS payments continue, cash flow shouldn’t become an issue for us in retirement. I feel no need to set a “goal” of any kind.
Ken, thanks for reading and commenting. I’m surprised that a utility company would employ bonus structures. I assumed they were tightly regulated, but I guess with the formation of large national energy companies they have more leeway.
Rick, deregulation changed a lot of things in the power industry. But I don’t think overall (inflation-adjusted) compensation changed much over the decades for most workers, only the way the pieces were assembled. The exception being that top management made a LOT more money as time went on.
When we set compensation budgets it consider the increase the unions received, inflation and to a less extent industry trends.
No one is ever getting ahead relying on broad based annual increases, they just stay even. It’s up to individual performance and career moves to make real progress.
But you will have a percentage nevertheless even if it’s by default. Some percentage must be meaningful.
The parameter itself is meaningless to me, though I concede I could easily calculate it or (heaven forbid) track it on a spreadsheet.
Owning my own company puts another slant on the base pay concept. I could have paid myself more but didn’t need the money, so I kept it within the business. My base pay was exactly what I chose it to be.
Mark, thanks for reading and commenting. I seems self – employed business owners have some more options than the average salaryman.
Rick, Bonuses were not a significant part of the compensation for the majority of employees.
As I have said, my bonus and stock awards were not signifiant until within five years of retiring.
Overtime pay for many union workers was quite significant and back then was used in the pension calculation.
As far as a two income couple, I say the answer is the base pay which was used to live on. Could be one, both or partial of one plus the other.
I don’t think saving over 35% of income is realistic for many people. The current savings rate is 4-5% and even into 401k plans it’s 14% including the employer match.
But I have no doubt anyone can make their case for less than 100% replacement and most do.
If pay and base pay are the same so be it. In that case, that is what the household lived on.
This is not all that complicated. As I have said many times, replacing 100% of base pay is a desirable goal, clearly not a necessity.
It provides a nice cushion even if expenses go down and more security if they increase. Less worry about inflation or the fact retirement income may not have a COLA. Or in some cases a cushion if investments decline unexpectedly. That means they are saving the portion of income not immediately needed. We save each month.
I worked until my pension and our combined SS met the goal. I could have retired several years sooner. But now after 15 years we have maintained every aspect of our pre-retirement lives. We could not have done that with less income.
If others disagree and are comfortable with far less income replacement to sustain a desired lifestyle good for them.
I sought no lifestyle compromise, no worry about inflation, the ability to help family, ongoing security for Connie and the ability to leave a legacy for our children and grandchildren.
I was willing to work longer to achieve those goals. Others have their own goals.
My wife and I both worked for the same megacorp and there was a base salary and a variable annual bonus based, at least theoretically, on performance. In practice, the major of employees got the average bonus and a few got more. The bonus was reasonably substantial-maybe 20% of base pay for an average one and 40% for a good one. I have made the same point as your post to the author before as to not needing to replace retirement plan contributions but honestly I am tired of the same topic as it has been raised in multiple forums multiple times.
Rob, thanks for reading and commenting. 20% annual bonus for an average performer is totally foreign in my experience, especially for a megacorp It would be interesting to to compare the combination of base pay and bonuses across industries. My experience is with large federal contractors.
Understood Rick. For context, the bar to “meet” expectations was reasonably high-one could not achieve that with minimal effort or mediocre performance. Also, for clarity, in my comment, I did not use the term average performer, I stated that most employees got the 20% bonus which was about average (in the middle of the bell curve..) in terms of bonuses. In effect, the average 20% bonus was really part of base salary in most years although one could get more or less by under or over achieving. I also did not mention that business performance in addition to individual performance was a bonus factor and there were a few times when bonuses were negatively impacted, including one year when no bonuses were paid.
What was that point? People don’t need to replace 100%? If so, I agree. It’s not a need, it’s desirable.
Is there any retiree who would not like to retire with 100% of their working base pay?
I don’t know why this is so controversial or why anyone would take the time to refute my view. Anyone who disagrees with the goal should just ignore it. I don’t know how a desirable goal can be disproved anyway.
It’s not about whether it’s a desirable goal – it’s that as a general piece of advice it’s largely meaningless.
100% base pay is a purely arbitrary statement – for a highly bonused employee used to living high off those earnings it might not even cover their current lifestyle, for others who are saving heavily as Rick’s example amply illustrates it might be as much as twice their cashflow needs. Why should someone who gets an unexpected payrise in the last year of work suddenly have to find 30x that in retirement ?
I guess it’s not the worst rule of thumb for someone who wants to expend absolutely zero effort in planning and anticipating their likely spending needs and wants in retirement but even then that doesn’t address how it may never be practical for many to reach or implies unnecessary time inefficiency in working far longer than may be necessary for a reduced time in retirement.
And of course it isn’t bombproof – there’s still many combinations of external and life events that can make such a strategy still fail, The question then is how much “buffer” should one build above 100% base pay replacement.
Why don’t we stick to common sense reality rather than huge bonuses or raises in the last year of work or two incomes making $100k or people saving 30-40% of gross income or suddenly paying off a mortgage.
None of that is the reality for most people living much closer to P to P.
The reason I use only base pay is to discount a lifestyle where total compensation replacement is likely to include unnecessary and non recurring spending where 100% of base is quite different than 100% of gross.
Is it necessary or productive to find exceptions?” Aren’t they a given?
If retiring at 50 is the primary goal and your planning tool says it all works mathematically, go for it. I’d sure like to know how much wiggle room I have to cope for unforeseen events and crisis.
I think you are talking out of both sides of your mouth. You use your own highly financially privileged position and your extreme psychological aversion to planning and budgeting to formulate a rule and then by a huge leap seek to apply it to the very worst savers those living paycheck to paycheck.
Guess what? As Rick says they will never hit your target. Not even close. And thus will need to work themselves into the grave or taper back lifestyle to SS plus whatever other income they do receive.
That’s why your rule is arbitrary and meaningless. It doesnt just fail with extreme examples it fails with most people because it’s not attainable nor necessary.
You may twist and turn all you like to avoid fundamental reality but what most people need to understand is what their outflows will be in retirement and which of those are discretionary and thus can be flexed. Only from that can they start to build an assessment of how to service those outflows. That is far better general advice than “seek 100% basic income replacement”.
“The reason I use only base pay is to discount a lifestyle where total compensation replacement is likely to include unnecessary and non recurring spending where 100% of base is quite different than 100% of gross”. I get this part.
So how do “most people living much closer to P to P” ever retire? If they can’t save, how is 100% of base pay remotely possible? Is it hopeless for them?
I have given thought to your base pay questionI because Chris and I had been saving about 40% of our gross pay prior to retiring.
Like us, I think female-single has good options. A conservative 3% distribution rate from her IRAs would provide $42K per year. Combining that with her Social Security benefit, regardless of the age claimed would result in way more income than she currently lives on.
I may consult with Dear Dickie on this one.
Thanks Dan. I agree SF is in pretty good shape. She has some options and would likely benefit from some optimizing. Like many, her biggest risk may be longevity combined with expensive care needs.
For your hypothetical scenario, it looks like the income she’d need to replace is $50K, not $100K—nearly half her income goes to retirement savings and taxes she won’t be paying anymore. Maybe a little more if she wants to still save for an emergency fund. But she could keep her $100K cash savings earmarked for that.
She could draw those funds for two years (full retirement age for SS) from the 401K and then claim SS. Or draw them for five years until she’s 70. I think in her situation, I’d probably file at 67 so I’m not drawing down my main savings too quickly. Taking money out of her 401K will generate a taxable event, but she’ll be in a low tax bracket.
My husband and I are in a similar situation to you and your wife. At age 56, he retired from a state agency, started drawing his pension and health benefits, and went to work for a private firm, drawing a substantially higher salary than he had with the state. Meanwhile, my salary also continued to increase, though not as dramatically as his did. From that point until now, we’ve had a lot of disposable income that we never had before and won’t continue to have once he also retires. Since 2016, we’ve maxed out three retirement accounts (401K, 457, and 403B), taken some nice trips, sold our house and bought a new construction condo, bought two new cars that will last us for a long time, and saved some cash, too. We also provided substantial support to our younger daughter as she recovered from injuries from two car accidents in 2022 and 2023. We do not need 100% of what we make now to get by in retirement.
I think this is generally the right direction.
I’d suggest a couple alternatives/additions.
For the time before she starts SS I’d suggest a more conservative asset allocation (say 50/50) and then maybe a little more aggressive (60/40) after she starts SS – this would mitigate sequence of returns risk.
The 200K Roth IRA is enough for 4 years of living expenses and is tax free, I’d use that for 4 years to delay SS to at least 69 and depending on how the portfolio looks either take SS or wait to 70. I’d also look into doing Roth conversions if she can swing the tax bill from her cash cushion. Since before taking SS her only taxable income would be the income from her cash position, she may be able to do some conversions at 0% tax rate.
Adam, just to clarify your last paragraph. Are you recommending using her existing Roth IRA funds for living expenses while simultaneously converting some of her 401k funds to her Roth IRA? That’s an interesting thought experiment – how would it play out in the long run.
Exactly.
Just rough numbers:
The standard deduction for 65+ single filer in 2025 is $23,750 (15750 std, 2000 for 65+, 6000 for new Senior Bonus deduction)
Assuming she gets ~4%($4000) interest on her $100,000 after tax cash she can Roth convert $19750 and pay no taxes. She can do this for 4 years giving $77,100 in Roth conversions tax free.
If she filled up her 10% bracket that’s an additional $11,925 a year at a tax cost of $1,193 which she could pay for out of her interest from her cash account. That would get her close to $124,800 in Roth conversions for about $4772 in federal taxes (3.8% effective tax rate). (This is approximate as deductions and tax bracket will increase over time)
So, at 69 she has an extra 2.5 years of living expenses in a Roth IRA that she can use to get delay SS to 70.
Also, since she was born in 1960 her RMD age is 75. So, once she turns 70 and starts collecting SS, I’d suggest evaluating if Roth conversion between 70 and 75 make sense.
Longterm results will really depend on how these assets are invested, (my suggestion in this case is keep the Roth assets in short duration bond or money market funds since the goal would be to use these now) but moving tax deferred assets to tax free assets at 0% tax rate seems like a no brainer.
Adan, thanks for the detailed response. I think I’m a little slow today, because I’m still a bit confused. You write:
So, at 69 she has an extra 2.5 years of living expenses in a Roth IRA that she can use to get delay SS to 70.
If she used her original Roth IRA account to fund her living expenses, I don’t understand the word extra. Wouldn’t she have effectively drained the original $200K in the Roth, while converting $125K? I apologize if I’m being obtuse and missing something.
I’m using extra with regard to the number of more years she could fund living expenses tax free (or very low tax) from her Roth IRA. You’re correct that the original 200K from her Roth IRA (4 years of living expenses) will be used up. However, as you noted after 4 years she will have 125K still in her Roth IRA (2.5 years of living expenses) because of the Roth conversions.
If she did not do Roth conversions but used her Roth to fund her living expenses she would only have 4 years of funding from the Roth – and then at 69 she would have to decide to whether take SS at 69, or fund that year entirely from her 401K.
Ideally, you would run the numbers for both scenario’s. That said, what I outlined seems like an efficient way to get the higher SS payout with a lower risk.
“Wouldn’t she have effectively drained the original $200K in the Roth, while converting $125K?”
That’s the way I see it as well. This would effectively get her to the same place as just taking a taxable distribution out of her 401(k) up to the amount of the standard deduction, and then taking the rest of her income needs from her Roth.
IMO, neither of these options make much sense to me. If it were me, I’d rather just take my income needs from my 401(k) until I was ready to draw Social Security, and save my Roth accounts for later. If she really wants to get fancy, she might even convert an additional amount to her Roth up to the limit of the 12% bracket in excess of her income needs, up until the year she starts Social Security. Then forget about Roth conversions, take her income needs from the 401(k)–whatever she needs in excess of SS. Once SS starts, Roth conversions are paying extra tax–just to be paying extra tax, and might actually be doing more harm than good. Then, when RMD’s start, maybe spend a little more, or just save more in her taxable account. Or make a QCD, or…?
Then, in years she when may need a little extra cash in excess of her RMD+Social Security, take a “tactical” Roth distribution, both to supplement her income, and to help control her tax bill.
My personal opinion–I don’t think in this case, it’s going to matter much financially when she starts Social Security, although I’d like to see her wait at least a year or two if she can. Just start SS whenever it feels right, and then forget about Roth conversions, as they’re not going to make much difference one way or the other, and only complicate her finances at this point. KISS.
“That’s the way I see it as well. This would effectively get her to the same place as just taking a taxable distribution out of her 401(k) up to the amount of the standard deduction, and then taking the rest of her income needs from her Roth.”
This is true.
I’m open to the rest of your position, but I’d like to see an analysis that shows it is a better option.
Nice analysis Dana. Thanks for commenting.