FREE NEWSLETTER
Go to main Forum page »
Jonathan used to chastise me for saying that I thought a good goal for retirement income was to replace 100% of base pay or salary- excluding overtime and any form of bonuses.
I was making a suggestion, opinion, not suggesting a requirement because given most people don’t reach that goal, it is obviously not required even while desirable.
However, that’s the way Connie and I live. In fact, between my pension and our combined social security, gross income is a bit more than 100% replacement- based on my salary in 2008. Ah, there’s the rub. The value of that income has been eroded 49% so are we actually now living on 50% replacement. I ask myself, where would we be if we started at 75%?
Who could be neutral in this debate? Who else but AI, so I asked ChatGPT?
The answer was most people need 70% to 80% – conventional wisdom from AI. It said, “Most People Don’t Need 100% Income Replacement in Retirement.”
So, I asked why. Here are the reasons given.
1. Work-related expenses disappear
When you retire, you stop paying for:
This alone can reduce required income by 5–10%.
Well maybe, but just as maybe, some of that may not apply. Dues, fees, commuting costs or childcare didn’t apply to us.
2. You’re no longer saving for retirement
This is one of the biggest reasons 100% replacement isn’t necessary. A portion of income likely goes into:
In retirement, you stop saving — you’re withdrawing instead. That frees up 10–20% of your gross income.
Again maybe, or perhaps probably, but anything above 10% may be a stretch for many people. We never saved above 10% unless you count my non-cash compensation. Plus in retirement we still save – in 529 plans (by choice) and into an emergency fund.
3. Taxes are usually lower in retirement
Retirees often pay less in taxes because:
For high earners, losing the 6.2% Social Security payroll tax alone makes a big difference.
Again maybe. But RMDs can hurt. Tax laws change. Investment income can vary. In some cases the FICA taxable wage base may be a minority portion of wages.
4. Mortgage is gone
For many households, the mortgage is 20–30% of spending.
That could be a biggy – if the mortgage ends just before or upon retirement. In our case the mortgage was paid more than five years before I retired so there was no impact.
5. Kids and major obligations are gone
People often spend less because:
Even affluent households see expenses drop by 10–15% here.
I have two problems with this assumption. There may not be children. Plus by the time a person retires these expenses probably have long been gone, unless you have children in college when your 65.
There it is. AI expertise on retirement income. The question is how will all this apply to your situation.
It’s still my opinion and only my opinion than as a buffer against inflation and unpredictable events that ..%…is a desirable goal.
In my opinion, targeting a percentage of income replacement in retirement is the wrong approach—it’s asking the wrong question entirely.
The real problem you should be solving is determining how much income you actually need. The better approach is to track your spending in the years leading up to retirement—getting that big picture view of your actual expenses—and then work backwards to calculate the asset value required to fund that amount. Essentially, it’s a bottom-up approach rather than a top-down one.