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 |
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.