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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.
So AI has spelt it out for you but you’ve found a reason to argue against every single point.
How about as in the many, many times you’ve tried to get your pet theory to stick to almost universal disagreement you, for once, consider looking at the problem from the other side – that it is not at all what your income in employment looks like that matters: it is what your expenditure is that matters?
A $ is a $. It doesn’t matter one jot whether it came from income, capital, interest, dividends, betting wins, found on the sidewalk when you spend it.
If you insist on having some rules re income I’d suggest that “if you’re still spending every cent of income you’re not really in a position to retire” is a better and more useful one for the majority of people. If people don’t understand the variable applications of their money then replacing income doesn’t help them – they are still living hand to mouth.
Tracking expenses in the years before retirement yields an answer you may need, but is the work necessary?
Look at gross income, subtract taxes to get net income, subtract all savings and haven’t you spent the balance?
Then subtract major expenses guaranteed to go away upon retirement. Isn’t that a valid starting point for income needed?
You could add new spending for things you didn’t spend before retirement like significant travel.
Why do people feel more comfortable tracking expenses in detail?
Have you ever watched any “personal finance guru sorts out people’s lives” type show?
Of course your method of calculating total expenses works but it doesn’t really provide any insight. The trope for those type of shows is the patients always say “We earn X but at the end of the month there is nothing left/overdrawn – where is it all going?”. Then the formula is to track expenditure for a month and present the insights and opportunities for easy wins back to them.
You clearly have more income than you need by the amount you give away. So your rule doesn’t even work for you even at a high cost time of life. Above a certain level of security people clearly have the ability to trade future income for time in the present, just as they, in their working lives have sacrificed time for current and (hopefully) future financial needs. Far better to encourage people to do their own planning and trade offs around that then hectoring them with some arbitrary “rule” that you’ve devised because you have an aversion to some fairly basic maths.