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An earlier discussion on Forum nearly exhausted the debate on the percentage of pre-retirement income needed in retirement. I rarely win the argument, but I press on.
First, my argument is not replacing income, but base salary. For me base salary was around 60% of total compensation.
Second, being able to live on say, 50% replacement is easier the higher starting Income. After all, 50% of $300,000 a year is still a hefty amount. 50% of $80,000 working income not so much.
Third, two major assumptions on why a lesser percentage is possible may not apply. For example, our mortgage was paid off many years before I retired, our gross saving was about 10% not counting that we saved my non cash compensation which was not used to live on. Thus neither a mortgage or saving represented a gain in spending power upon retirement.
Our saving has not decreased upon retirement, but has changed in scope and I include saving for grandchildren in that as well as building and maintaining an emergency fund. Our charitable given has increased through QCDs.
The day before retirement our employer health insurance premium was $197 a month. Today for Connie and me it is over $2,200 a month for Medicare and Medigap.
First our travel and now winter time in Florida adds more to annual spending – roughly an amount equal to10% of my pre-retirement base pay.
I retired in January 2010 so inflation has taken its toll on my fixed income aside from SS. One dollar in 2010 now takes $1.46. But my strategy has provided a cushion.
Our lifestyle has not changed, but improved, no compromises necessary and other than RMDs no withdrawals from investments.
Can retirement be on less than 100% salary replacement? Obviously it can as most people do. Can pre-retirement lifestyle be fully maintained for 20 of more years starting with far less than 100% replacement ? I don’t buy it.
So, each to their own. No argument from me, but my conservative self likes no compromises and a big cushion for the future.
Alot here depends on assumptions about what retirement needs and wants are.
I’m generally not a fan of % of salary retirement goals as one approaches retirement, because income and spending are different. The % of salary needed for retirement along with the 25 x salary (4% rule) for retirement savings are good approximations early in ones career to help incentivize saving and investing for retirement; but as one hits their mid 40’s and early 50’s that should give way to more detailed bottom-up planning and goal setting.
As for my family – we are currently living quite comfortably on 35% of our final salaries after retiring a few years ago in our mid-late 50’s. We are currently living off taxable savings until we have to take RMD’s and SS. We are also putting our son through college without the help of financial aid. While we did earn well, we also saved, lived well below our means, and were diligent and disciplined investors in broad stock index funds.
Regarding base salary vs. Total compensation, we never had things like stock grants or bonuses. However between living in a low cost area and the lack of house and car payments we were able to take full advantage of 401k, IRA, SEP, and H.S.A contributions. Those lowered our income by about 50% to about 60k, which in my mind becomes base salary. We still live on that amount, but between SS and a 3% IRA distribution our income is about 45% more than current expense, with the excess going into a brokerage account. So even though our current income is only about 90% of our gross income while working I feel very confident going forward.
I am not sure if the focus should be on income replacement, or on how much you were spending before retirement, or what your future spending might be after retirement. Before I retired in the middle of 2001, we had been saving more than 50% of our gross income from our net income. As I have mentioned in a couple of previous responses to articles or posts here, the word income has so many uses that it is a poor choice in many situations.
What a potential retiree needs to think about is how much of what they are spending pre-retirement will be necessary for the lifestyle they want to have after they retire.
For some with big travel plans, planned spending might be higher, while for others spending might be the same or lower if they downsize and relocate.
Then the question should be where will I get the cash for that planned spending? And, how will I be able maintain that cash flow for all the years I will be retired. Remember, spending is the net, while income generally represents the gross.
Dick: I appreciate your passion on this topic, but I think it’s time to face reality. While the Quinns may need 100% of base salary for a comfortable retirement, there are plenty of folks who are having wonderful retirements on a far lower percentage. Inflation is certainly a threat, but increases with inflation are baked into both Social Security and the 4% rule.
You are probably right, but as they say, the devil is in the details.
It would be interesting to see how life changes or not for those who have retirement lifelong expenses that allow living on 40% to 60% of former income. Must they relocate, do they cut back?
Retirees as a group, especially the older group seem to do a lot of complaining about their incomes, inflation, health care costs, etc. and with SS and modest savings even pensions they are living on 40% to perhaps 70% replacement.
Doesn’t seem to add up.
We all make financial adjustments throughout our lives. The kids go to college and we’re faced with big tuition bills, so we take less expensive vacations. The roof needs replacing, so we put off getting a new car for another year. If we readily adjust during our working years to life’s financial challenges, why shouldn’t we do the same in retirement? I’ll say what I said before: Lots of people are having perfectly happy retirements on less than 100% of base salary. Let’s not set the financial bar so high that folks are too scared to leave the jobs they hate or they spend their retirements in a state of permanent financial anxiety.