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Yesterday I read a recent blog post on a retirement planning site. The headline read “ Can You Live Happily in Retirement With Just 66% of Your Work Income? (Yes! Most Do)“
As you can image, that caught my eye. I went to the source of the survey at T Rowe Price. Here is what the survey said in part.
“Living on less: Nearly three years into retirement, retirees report living on 66% of their pre-retirement income on average.
But that has not translated to dissatisfaction with their lifestyle: 57% report they live as well or better than when they were working.
And 85% agree with the statement, “I don’t need to spend as much as I did before I retired to be satisfied,” including 37% who say this describes them a “great deal.”
Most (65%) like not spending as much and see it as a new found freedom from “keeping up with the Joneses,” with 25% saying this describes them a “great deal.””
All that is quite a revaluation- especially to me. 🤑 However, a closer look at the survey which was presented as reflecting current retirees was taken in 2014.
In 2024, I’d like to survey those folks again starting with the question.
How you doin? Who knows, maybe just fine even after a 32% loss in buying power.
Three years before retirement I went to half time. Two years before retirement I went to quarter time. I got used to living on 25%, and when I started getting SS and pension I got back to 50%, and a, not spending that much.
When I read something like this I am curious and want to learn.
To clarify, during those years and now, all your spending on anything necessary or discretionary came solely from the part time work or now from only pension and SS?
Dick, you mentioned that: “The median income for retirement-age Americans is lower than average expenditures for that group, suggesting a savings shortfall that could threaten retirement for many.”
Well, first of all, median ≠ average. I assume you are comparing the median income for retirement-age Americans (age 65+) and the average expenditures for retirement-age Americans (age 65+). If so, I am sure that this age 70+ worker, and nearly 20% of the other older Americans who are still working, drive up the average while most of us are well above the median (if only because those of us age 70+ have incomes from Social Security and wages, and maybe even RMDs).
Second, national surveys tend to underreport income:
https://www.forbes.com/sites/andrewbiggs/2024/04/04/america-needs-a-fact-based-retirement-debate-part-2/?sh=52cc977e563a
Third, yes, consumption exceeds income, yet, somehow, some “worry” that people are not spending their nest eggs a trend that appears to have continued despite the pandemic. https://www.cnbc.com/2021/08/25/most-retirees-arent-tapping-nest-eggs-before-required-withdrawals.html#
Sure, many older folks wish they had saved more. But, at what cost? Life is not a dress rehearsal for retirement:
https://401kspecialistmag.com/maximize-outcomes-not-incomes-die-with-zero/
A much more useful guideline is to target 20-25 times your estimated annual retirement expenses, minus other sources of income like pensions and Social Security.
I’ve found the rule of 300 or 400 helpful which says multiply your monthly expenses and that is what your pot needs to be at retirement. It’s exactly the same as a 4% or 3% safe/sustained withdrawal rate for a total portfolio at retirement.
The assumptions around this rule of thumb take care of inflation and tax hypothesising. But it is starting point for getting to a point where individuals feel comfortable and secure.
I recently listened to a podcast where they were fairly persuasive that the current and future generations of retirees (with predominantly DC pensions) are basically doing something that hasn’t really been done before (outside of the multi-generationally wealthy). Having to manage a pot of resources for all of their future lives/surviving partner’s life, care requirements and potential inheritance.
Past retirees had it much simpler with largely SS & DB pensions they got what they got monthly without thinking about it too much with hopefully some COLA/inflationary adjustment. Now there is more opportunity to lifestyle your retirement spend flexibly. But it comes at a price of having to get to grips with long term upside and downside and accept some risk.
It’s why I’ve been pushing back on the idea that income is all. It might be if that’s all you’ve got. But ultimately a $ is a $, doesn’t matter whether you got it (net) by annuity payment, interest, dividend or capital appreciation. Its spending power is the same.
Now all I ask is how are all possible expenses estimated for years in the future? Living expenses are a lot more than the basic monthly utility, tax, food, etc bills.
Just since the beginning of this year unplanned, unexpected expenses of about $7,500 popped up for us.
If we just work longer and save more there’s no need to estimate future expenses?
They aren’t estimated in advance specifically it’s why you build in buffer or sinking funds or whatever you want to call them. Perhaps your aversion to spreadsheets and budgets doesn’t enable you to see what is again a basic of personal finance.
As to where you find an extra $7.5k, well the S&P500 is up about 17.5% (total return) so far this year so probably not too much of a challenge for rainy day investors.
Doesn’t a budget estimate future spending? You seem a bit optimistic on help from the markets .
Now I think you’re just playing semantic games.
You clearly don’t believe in any SWR theory. But you should probably think about them to see if they do answer your questions on income and inflation. And the fact that you only need anticipated spend today to to plan with such a theory.
It’s not perfect but it is a data backed way of thinking about things. As is plenty of survey data about what people actually spend in retirement to benchmark your own estimates.
SWR theory?
LMGTFY
https://www.investopedia.com/terms/s/safe-withdrawal-rate-swr-method.asp
If I was living off accumulated investments, I would go nuts trying to figure out withdrawals. I would be under constant stress given all the unpredictable variables.
I would strive to depend on an income stream not directly related to the value of investments, but made up of an annuity(ies), SS, dividends and interest with a bonus of mutual fund capital gain distributions with a significant cash pool for contingency spending.
You have to take RMDs, don’t you? Do that in January and that’s your income for the year. Or do what I just did and set up a CD ladder, then replenish with the year’s RMD. If you have a simple two or three fund portfolio you just sell from whichever fund is ahead.
If you really don’t know what SWR is, maybe you should do some more research before advising people on retirement spending.
I didn’t recognize the acronym, that’s all.
Well you’re probably lucky that you were in the generation that still got DB pensions etc. Reality for most of today’s workers is they have to get to grips with it because they have to decide when it is “safe” to retire and make big decisions with DC pots, investment mix etc.
You’re safety first and maintain lifestyle above all else so you’d probably be working longer than your peers.
But seriously read up on SWRs and see if it wouldn’t help you to not go nuts if you were 20-30 years younger. Once you get your head around it and the ways you could build in personal safeguards it is quite liberating although you do need a certain baseline faith in long term market performance.
I don’t think anyone seriously advocates fit and forget on it but of course you can improve in lots of small ways e.g. lag your inflation adjustments by a year or mentally or actually allocate any underspend to a contingency pot for the unexpected.
I think one reason you’ve received such pushback on this thread is that you’re trying to formulate a rule based on your situation 15-20 years ago. But it simply is less relevant to those actually having to make the stay/go decision now.
I am not sure how we got off on all these tangents. My post simply said that surveys show people say they can live on 66% replacement and I asked if that starting point held for many years.
A couple of points. The majority of American workers never had a pension so somehow they coped – not exactly pleasantly in some cases I suspect.
I have not talked about withdrawal strategies because I don’t use one and I don’t see that as the main issue, but behind what needs to be accumulated. As I said, I favor a steady hopefully guaranteed income stream as most important and least risky.
I am amazed that there is so much pushback when I say 100% replacement of base pay. If I am wrong, I am wrong. If others don’t see it as necessary so what? I sometimes wonder if there is a bit of “thou protest too much” going on, especially among very early retirees who have decades to navigate in the future.
My premise is also that one wants to fully maintain their pre-retirement lifestyle with no required changes.
Clearly the differences in lifestyle is important, so is family status -children and grandchildren, spending priorities, existence or not of a dependent or two incomes among other things. Understanding the difference in paying expenses and spending is also important.
If a person can meet all their goals, live as they like without necessary compromise and confident of their secure financial future and do it all on 50% of pre-retirement income or any percent less than 100% so be it and more power to them. They should not worry about what I say or do.
I’m sure you don’t mean to but all you’re managing to do in this thread is come across as stubborn and closed to alternate ideas.*
Your 100% of income (which is actually 50% of income because AIUI your wife does not contribute separately) “rule” is pretty meaningless whereas at least there has been a weight of work behind testing out SWRs. And like it or not there will be people who come to HD looking for guidance on how they should think about their own retirements in a world where all they have is a 401k plus the prospect of some SS. So some income down the line but a whole lot of decisions to make. It might be absolutely terrible advice depending on timing for them to annutize that 401k because they’ve read they must have “income” in the traditional sense.
Or put another way if you’d been unfortunate to be “corporately downsized” while you pension +social security only stood at 80% of replacement income would you have been desperately pounding the (virtual) pavements for another role or would you have looked at the balance of your assets to see if they could meet your needs?
*I’m not taking it personally or intend it as a criticism because I’m aware you have real life things that are far more important
I see no connection between a withdrawal strategy and the amount of income replaced.
Income is income and no matter the withdrawal approach it’s the amount you have to withdrawal from that matters. Is that not true?
Actually I was almost downsized in 2005, but the merger failed. Real life I would have received a lower pension, lower SS and I would have had to rely on withdrawal from our 401k. How I have no idea.
As far as annuity goes, simply for simplicity and peace of mind I think a portion of assets should be in a annuity to cover basic living expenses and I favor using non-qualified funds so a portion is not taxed.
I don’t understand your 100/50% comment regarding my wife not working. By the way in our case I see the 100% concept as a key part of survivor benefits as well.
Annual withdrawal = Income for someone who has a 401k as their sole source.
So determining how long that annual withdrawal can last or how you will withdraw is critical. Even if as a couple you both have healthy SS and the 401k only has to bridge a period until you draw SS.
Annuity may be simpler but you sacrifice future growth to buy it. And you pay a healthy premium to inflation proof it.
My 100/50 comment was just to identify that in a couple of roughly equivalent lifetime earnings 100% of both incomes could well be excessive even by your measures and/or to identify that the measure for single people would clearly work differently.
FYI, 300-400x is pretty much the same as 20-25x, just stated in terms of monthly expenses rather than yearly….and 300-400x monthly is quite a bit more conservative.
Maybe a better question is what were you spending while working (less taxes, mortgage payments and savings) vs what are you spending in retirement. My income less federal & state taxes and SS & medicare tax was $123K. Now reduce that by 401K & IRA contributions, savings, and mortgage pymts to get $65K. To keep it apples to apples, I reduced my SS/pension for taxes. The result is my spending is 92% of my spending while working.
How about new spending in retirement that can easily offset possible lower spending? What if there was no mortgage?
The 4% rule works good as a back-of-the-envelope estimate. We paid off our mortgage (2017 tax cut) before retiring, i.e., no debt going into retirement.
However, 5 years before my estimated retirement date, I needed more clarity, so we wrote a withdrawal strategy. It would take 2 articles to go through the details, but in summary, we did the following:
Identified current and future spending and divided it into major buckets such as “Emergency Fund”, “Essential & Discretionary”, “Home Maintenance”, “Aging in Place (Home Services)”, and “Healthcare/LTC”. Most people underestimate the cost of healthcare & aging. It was an eye-opener for me. Our hobbies aren’t expensive: hiking, biking, golfing, gardening/yard work, cards w/friends. We traveled extensively when we were younger and are homebodies now.Identified a funding source for each bucket. For example, the Emergency Fund is funded by a no-penalty CD/Hi Yield CD. The Essential & Discretionary spending is funded by our pension and SS, and Aristocrat stock dividends that cover our semi-annual RE taxes and home insurance. And so on.We review our funding sources holistically to make sure we are diversified. We also go thru the exercise to see if we can mitigate some risk such as inflation, market risk, longevity risk, etc. Lastly, we are doing Roth conversions until age 73.
Sounds quite organized similar to what we do, but more detailed. That steady income stream is the key
Couldn’t have said it better!
I had a boss that told me to build an income stream that matched my salary. Unfortunately, I didn’t take it to heart until a decade later and never came close to matching my salary. He had rental units which for me were a hassle. So, I used Dividend King/Aristocrat stocks in a taxable account and Roth account. The dividends help alleviate market risk and cover the bumps of everyday life.
Precisely! Various rules of thumb based on percentages of salary are useful as “back of the envelope” estimations. I found it more helpful to know the actual amount of dollars I was spending each year during my last five years before retirement. My goal was to replace 100% of that amount. Once retired, I would need to withdraw an amount each year, which when combined with Social Security benefits and subtracting taxes, would allow my annual spending to continue as before.
I think it depends on what your income was while working. We get by on 10% or less of my working income. SS and dividends more than covers our needs and wants. Also, we do not live frugally.
Youza, a new record at 10%. No doubt a very significant working income.
Personally, my dollar amount of expenses did not change much from pre-retirement. The composition has changed drastically. Medical expenses have increased, but I no longer pay FICA or state income tax. There are also a few new expenses, but controllable.
I tend to be a bit frugal, but I have no issue living on 50% or less of my pre-retirement income. This year should be about 35% of my pre-retirement income. Spending is a choice and at this point in my life, spoiling a couple of little grandsons ranks pretty high and is my toughest to control.
Keep in mind, my position is 100% of base salary only, no OT, no bonuses, no non-cash compensation.
If you live the way you desire, you are in effect saying you can live on SS alone as that typically replaces 40% of income. More power to you.
Sorry I hit a nerve, but I just don’t need spending to make me happy. Remember the Shaker hymn ”… tis a gift to be simple, tis a gift to be free…”
It’s always nice to hear from a fellow ‘simple lifer’!
You can indeed live on 66% of your salary provided you have no mortgage payment. I know someone who lives on 45% in the DC suburbs of Maryland, and says she doesn’t have to skimp.
But we need the rest of the story. How much was she earning just before retirement? Was the mortgage paid off shortly before retirement and what other expenses dropped, like large savings rate pre- retirement. If a person was earning two hundred thou, 66% is fine, but not the same if income was $60,000 I wouldn’t think.
Right. It depends on your income when working
So your rule-of-thumb only applies to people with a mortgage in retirement, and a low savings rate and low income before retirement?
No, not at all. However, it seems the higher the income the easier it would be to cut back if needed or desired. If a person paid off a mortgage immediately before retirement that would be a gain, but if it were paid say 3-4 years before I maintain their lifestyle had been adjust by retirement so no significant change.
In those rare cases of someone saving 30-40% of income, that too would be an outlier.
My perspective relates to more average Americans who may be earning $60-80 thousand a year and below. They have minimal room to cut back IMO. They should be striving to replace – from all sources- 100% of base pay.
We had no mortgage, saved perhaps 10% of base pay and not low income and I worked to meet my goal. Now nearly 15 years later and with a mostly fixed income I am glad I did.
That is not to say our basic living expenses require that, but our spending does, our ongoing lifestyle does and years of inflation does.
I think income level is irrelevant. It’s about lifestyle. My top salary, during my final year of work–and after 30 years of full-time employment–was $74K.
I can only speak for myself, but people with moderate incomes generally tend to live moderate lifestyles. I never owned a vacation home. My primary residence for the final five years of my career was 1100 square feet in size. I’ve never been to Europe and I’ve never owned jewelry, fine china or even much furniture (and most of the furniture I have owned came from Ikea).
I learned early on to never pay full retail price for anything if you don’t have to. I learned early on that if you are going to own a home on a moderate income you better learn how to fix some things on my own. I learned that libraries are fabulous resources filled with vast amounts of free entertainment. I learned that being able to cook your own meals is far less expensive than eating out (and far healthier as well). I learned that having a job with a lower salary–but excellent benefits–can be an fabulous way to be able to retire at a younger age.
Kristine, reading all your posts over the years, you made it clear you are happy with your lifestyle by choice. On the other hand, isn’t it fair to say you are uniquely you.
Income is relevant though. If you live your lifestyle on the replacement of say 70% but if you earned $150,000 and maintained the same lifestyle you enjoy, your replacement percentage could be far less than 70%.
You may live modestly, but I consider being able to retire at 55 a significant luxury.
Income is relevant for this conversation because if one had a very high income, they could live on a lot less than 60% during retirement. My income (commission in financial services field) many years was very high, but we never overspent on things. We spent wisely. Took vacations each year but didn’t go overboard, although we could have. We lived a moderate lifestyle compared to our income. I think it is great that everyone does what is best for themselves. Whatever works, works.
I AM uniquely me–and proud of it! 🙂
I do live modestly and always have. That’s exactly why I could retire at 55!
If I had earned twice as much money, would I have lived differently? Probably. But I never knew what it was like to earn $150K a year. I suspect it would have come with far more stress and expectations. And, perhaps, I would have felt the need to buy ‘stuff’ as a way to counteract that stress. It’s certainly not unusual to hear people talk of how they ‘deserve’ a lavish vacation because of all the stress they endure in their jobs.
My job(s) certainly came with some stress. For several years I was responsible for diagnosing chromosomal abnormalities in people. The work was tedious and required an enormous amount of attention-to-detail. That said, none of my jobs ever came with so much stress that I felt they warranted me earning a higher salary. I had great benefits and, in the end, that allowed me to achieve everything I wanted to.
I don’t think Kristine is any more unique than you are.
The fact that both of you have been able to meet your retirement goals despite having had very different careers reinforces my contention that your 100% of income mantra is pointless.
Time will tell. Don’t forget I have 14 years experience with retirement spending of all types.
to your pointless comment. If that is true then there is no possible guideline for anyone, no percentage or dollar amount, but there sure are many pundits who sell the idea there is.
One pointless guideline obviously doesn’t imply that other guidelines are useless. Unlike your seat of the pants opinion which is based on your unique situation, other guidelines are based on extensive data analysis and often include best case and worst case scenarios.
First, I never said 100% of income.
In any case, I find it interesting that there is so much concern over my opinion. Obviously here on HD there is little agreement, so be it.
If anyone can retire in their 50s, even 60s, with an income of 60-80% or less replacement and live as they desire without required cutbacks, and meet all financial issues they may face over the next 25-30 years, my hat is off to them.
Pundits are often wrong. I maintain that your expenses are a much better guide than your income (regardless of how you calculate income). If you are living happily on $x while working, no reason to think you can’t live happily on $x while retired. Doesn’t matter what percentage of income it was, always provided it was less than 100%.
This⬆️
Amen!
I think having read all the forgoing there is a certain amount of talking at cross purposes. Surely this is one of the most basic foundations of retirement planning (and discussed at length in the FIRE movement).
Do you want to have time/freedom (i,e, being retired as long as possible) or money (having financial security, funds for every desire or eventuality)?
Neither choice is “wrong”, they are highly individual and indeed most people seem to end up blending the two if they have adequate means. And if you have a life partner it is probably essential to have some congruence on the priority.
There is no magic number in future income vs working income. It all depends on what your working income goes on. If a substantial part is going into retirement savings, and other savings and investments or indeed finance liabilities that will have been met by retirement date that income is no longer needed. Same with future tax rates – it may be that less income and blending from tax advantaged sources means that a significant reduction in gross doesn’t mean that big a drop in net.
I’d wager that a lot of people think they’ll spend the same and then don’t e.g. in just one area because lack of working stress and time shortage means less eating out/carry out for expediency and more home cooking. Equally if you think you’re suddenly going to be doing a lot of long haul travel when it hasn’t been previously a significant part of your lifestyle it probably won’t become so because it can be exhausting.
On the other hand part of the reason that the exam question exists is because a lot of people still sleepwalk into retirement either through forced redundancy or simply ageing out of the workplace without ever considering exactly what their needs are
I can sympathize with the Quinn view but also see that it can look a lot like forcing unnecessary labour for a comfort blanket that may not even be necessary.
Any rule-of-thumb based on salary prior to retirement is nearly useless. If a couple made $150K their last year before retiring, but they spent $75K, they only need $75K in retirement to keep the same standard of living as when they were working. I think that’s the part Mr. Quinn is not grasping.
How many Americans do you know who live on 50% of their income?
Irrelevant. Maybe someone wants to live in retirement on 125% of their ending salary. If they saved enough and have government pensions, that’s entirely possible. Which salary does your rule apply to, just the last year of working, an average of all years? What if they got laid off and took a lower paying job the last few years before they retired? Income while working has nothing to do with retirement planning.
There are a lot of what ifs there.
I use base salary the day before retirement as a guideline.
Obviously I disagree income has nothing to do with retirement planning, but I also assume that when people retire they at least want to maintain their lifestyle if not improve it. Also, that relocation and downsizing is a choice not a necessity.
It’s been explained multiple times that “lifestyle” is determined by what you spend, not what you make.
And what you spend is not limited by what you make?
Limited by, yes, dictated by, no. Why do you keep insisting that everybody spends every penny they make? People keep telling you that’s not true, and you keep ignoring them.
PS. Recall I have always said the % replacement was on base salary alone, excluding even overtime pay. In my case, my base salary during my last five years of working was about 60% of compensation.
Income is income. Aside from the last three years, when the mega-corp introduced very modest bonuses, my income was my salary, period. Apparently you were in fact living on 60% of income.
Thats why i never said 100% of income, but base salary. In addition, in our case we never used non cash compensation as income to spend, it was invested except in one case of remodeling.
Many Americans have forms of income beyond base pay, even part time jobs or just overtime
So if someone has two part-time jobs only one salary counts? That’s nonsense. If you choose to save rather than spend overtime pay it’s still income. Admittedly stock options don’t count until you exercise them, but how many of those average Americans you talk about get stock options? I never did.
I never said that. I don’t spend every penny I earn and never did.
In retirement we still save, we have increased donations, we help our children and grandchildren, we fund 529 plans. You can call that spending or not, but clearly discretionary and to us desirable.
My philosophy of income replacement allows for many contingencies beyond covering expenses and as I said several times, provides a financial cushion, including against inflation given my pension has no COLA.
HD folks may be different, but the retirees in other groups, including ones for my old employer do a great deal of worrying about inflation, gas and food prices and wanting a higher SS COLA.
I’ll take this as an admission that spending determines lifestyle. I think you are also conceding that expenses and income are two different numbers. 🙂
Not conceding because I never said otherwise. I assume you have heard of lifestyle creep. Earn more spend more and thus change your lifestyle in the process.
Sure spending is reflective of lifestyle, but income determines ability to spend and hence ability to sustain lifestyle.
If one wants to change lifestyle they spend more or less, but if they want to sustain a lifestyle- upon retirement- they need to sustain income keeping in mind that includes discretionary spending as well.
I spend twice as much as I spent when I worked. In the past ten years, costs have gone up, plus as you get older you realize you can’t take it with you, so you might as well spend at least some of it.
I think that’s the key, understanding that expenses and spending are not the same thing. Paying expenses gets you by, the ability to spend as you like is your lifestyle fulfilled. For some paying expenses without worry is fine, but not for others.
Wrong. A house payment is an expense. The size of the house payment is a component of lifestyle. Ditto cars, restaurants, etc. etc.
Kinda list me on this one.
Isn’t the real question are you fully satisfied with your lifestyle in retirement and are you comfortable that satisfaction will be sustained for the rest of your life regardless of financial ups and downs?
What else matters from a financial point of view?
How many times do I have to tell you that I retired 24 years ago on considerably less than my final year’s salary without changing my lifestyle? I also got to travel extensively which I enjoyed a lot more than I was enjoying my job by the late 90s. Now I have moved to a CCRC I expect to start drawing from my portfolio, but that’s what it’s for.
Maybe some black swan event will occur that impacts my lifestyle, but I bet that it would impact those living a more luxurious lifestyle more than it would impact me.
You remind me of my first husband. It was so much trouble to convince him he was wrong that unless it was critical I often didn’t bother.
i wasn’t addressing you. I received your message loud and clear.
It doesn’t seem like it. Are you simply going to ignore any evidence that disproves your case?
I’m verging on early retirement. I’d say ask me in 30 years. I will a) probably be delighted I’ve lasted that long and b) better able to tell you whether I was satisfied with my lifestyle.
The answer to b) will almost certainly be less than perfect because of health, family, whatever geo economic/political unknowns and constraints arise etc. But I suspect that my dissatisfaction will be largely driven by externalities rather than my post hoc regrets over my own decision to go at time X with amount Y in the pot. Hopefully in that regard I end up regretting not freeing myself earlier because I still have more than ample remaining than forced into late life penury.
I’ve been away a family event all day, and I feel like I missed a lot of fun.
There have been lots of interesting comments, but I haven’t seen any discussion of the assertion that the retirees in the study suffered a loss of buying power of 32%. The study indicated that on average the retirees said 40% of their income came from SS. The SSA’s COLA tables show that $1 of SS benefits in 2014 is worth almost $1.30 in 2024 (depending on your starting point). So SS basically kept ip with inflation as it is supposed to.
In addition the study said the retirees had some level of home equity and investable assets. Since 2014 the S&P500 has risen an inflation-adjusted 121%, This would allow retirees using some form of the 4% rule to supplement their income to increase their yearly withdrawals by an inflation adjusted factor.
Housing values, according to the Case Shiller Index, have risen about 90% since 2014
And yet according to a March article Motley Fool,
The median income for retirement-age Americans is lower than average expenditures for that group, suggesting a savings shortfall that could threaten retirement for many.
Pew projects that 32.6 million retirement-age households will have an annual income below $75,000 and an average cash shortfall of $7,050 by 2040.
The National Council on Aging found that incomes for 45% of Americans 60 and older are insufficient to support basic needs, and 80% of households in that age group are financially struggling or in danger of financial insecurity.
Low- and middle-income workers — particularly baby boomers — are at risk of not being able to sustain a 70% income replacement rate, according to Vanguard. Millennials and Gen X are in better shape for retirement except for those in the 25th income percentile, per Vanguard
I posted too soon! Since many retirees downsize to tap into home equity, this is another potential source of income for our retirees. Of course, everyone’s situation is unique. We need to look at more than just the CPI to understand how a given retiree’s standard of living changes.
My point has always been retirement should not require compromises to maintain a desired standard of living.
Downsizing, relocation to lower cost areas are fine if that is a desired move and not required to survive. Of course, downsizing does not always result in significant, if any savings.
Taking a reverse mortgage does not seem desirable to me as it indicates insufficient income and is a last resort.
Also, let’s say the impact of inflation was only on 60% of income (assuming the CPI-w SS adjustments took care of the rest – which retirees claim doesn’t) that still seems quite a hit to deal with.
And how many times do people have to tell you that they have achieved a desired standard of living on a lot less than their final year’s salary? Just because your desired standard required all of your salary doesn’t mean that other people want that standard or alternatively that they need all of their income to achieve it.
one other change which may represent a positive change for retirees is the TJCA. For retirees who don’t itemize, the increased standard deduction and reduced marginal rates could reduce a retirees tax bill. For example, in 2014 a married couple with a taxable income of $78,801 was in the 25% bracket. Using the 32% inflation factor, that would equate to about $97,417 in 2024. The amount would put the retiree in a 22% bracket. The states tax retirement incomes in a variety of ways. My birth state of PA does not tax retirement income; my current state of NJ has up to a $100,000 exclusion for retirement income,
Here is another approach I like. After retirement, there is some down sizing and relocation that results in monthly expenses coming down. Make an estimate of expenses post-retirement and if that is 60 % of your passive income (SS, pension) after taxes, you are in good shape. For the next 15-20 years, this cushion will likely cover most inflation, without dipping into nest egg.
Focus should be on generating enough passive income. Replacement % based on income before retirement does not cut it as a rule of thumb.
what If downsizing and relocation is not what a person wants in retirement?
Simple. Take your expenses after retirement (even if it is higher than that before retirement) and make sure you have passive income after taxes in retirement with a cushion to cover inflation over 20 yrs. In my mind, it has little to do with your income before retirement.
Winner!
It seems projecting expenses for 20-30 years in the future is a bit difficult and if you are wrong and base your income on those assumptions what do you do?
Before retirement doesn’t income limit spending? Why make it more complicated than necessary and reverse that in retirement?
Income only limits expenditure if you want a richer lifestyle than your income supports. You apparently find it impossible to accept that some people are perfectly happy living below their income. Try being a little more open-minded.
Absent incurring debt, income does limit spending, but of course that does not mean all net income needs to be spent to be happy. The problem is when that income is not sufficient to be happy over many years.
Funny thing about this post and related comments, I never mentioned 100% replacement. I only asked if ten years after retirement 66% replacement would still be sufficient.🤔
I think we would all agree that time is more valuable than money. I think we can also all agree that plenty of folks are able to retire on far less income than they earned during their working years. That may not be true of the Quinns, but plenty of folks have attested to that. Which raises a question for Dick: By insisting that folks will have a financially deprived retirement if they have less than 100% of their pre-retirement income, are you frightening folks into staying in the workforce — and perhaps causing them to foolishly pursue dollars at the expense of something far more precious, which is time? Dick, are you perhaps being too strident, and isn’t it time to acknowledge that’s what true for the Quinns isn’t true for everybody?
To be honest, this whole argument about what percent of income you need for retirement seems a bit silly to me. Compare a person with 10K in their retirement account and pension/SS of 50K to someone with 1.5M in their 401(k) and SS of 35K-no pension and no RMD. Assuming they both had the same ending salary, who’s better off? Too many variables to use any percent salary rule of thumb across the board.
I am not insisting on anything.
I assume what is true for one person is not true for any other.
It boils down to choice of lifestyle in retirement. Seems to me there are three basic choices- no change from pre-retirement, increase in lifestyle or as Kristine illustrated pretty significant changes by choice or actually any reduction the worst not being by choice.
The other factor is being comfortable with future “what ifs” and your finances. I tend to be conservative there trying to account for possible events.
My goal was no change, but actually in some ways it has increased when it comes to family and giving.
Bottom line, no one size fits all. But I see no harm in striving for more of a safety net.
I wrote an entire article on retiring in 2000 on much less than my pre-retirement income, without changing my lifestyle and adding extensive travel. What part of it did you not understand? My current income, which now includes Social Security and RMDs along with my non-COLAed pension is about 60% of my inflation adjusted final salary, and I am still maintaining my lifestyle. Before I moved to a CCRC last year I was spending less than my pension plus Social Security, my RMDs simply moved from untaxed to taxable.
Of course, I wouldn’t have a second home as a gift – maintaining one was quite enough for me. I consider that a luxury. Equally, I wouldn’t have most cruises as a gift – another luxury. Extensive gifts to children and grandchildren could also go in the luxury column. You have chosen a lifestyle that requires an income equal to your pre-retirement income. That is a choice, why do you insist on trying to convince people that it is a necessary choice?
Hear! Hear! There are so many things that change when we retire that make the 100% of pre-retirement income mantra arbitrary. A key factor for us is that we lived on considerably less than our income for at least the last 20 years of our careers. It simply doesn’t make sense to assume everyone will need at least 100% of income in retirement regardless of how much they saved each year when they were working.
Also, as RQ himself has acknowledged, some expenses decrease and others increase in retirement, which makes it a stretch to assume that these will cancel each other out for most people. He also ignores the fact that an increasing majority of retires don’t rely on pension income that doesn’t adjust for inflation for a significant part of their retirement income.
I resent that you are implying I’m in the ‘worst’ of your three ‘retirement lifestyle’ categories.
Choosing to live a simple life is not a worst case scenario. I suspect many people would find simplifying their life refreshing. How nice is it to actually appreciate a dinner out that costs $11? How nice is it to be able to spend your days pursuing the activities you enjoy which just happen to cost very little money?
It seems to me like you have a difficult time understanding how anyone who has less than you do could be happy. I have run out of ways to try and explain it.
What are you saying? I didn’t imply that at all. I said you made the right choice for you. What’s wrong with the simple life? I did acknowledge you lowered expenses via your choice but other people may not have the choice and are required to lower expenses.
I consider us the “regular” people you are talking about, Jonathan. I don’t feel deprived by our lifestyle, I am grateful for it. There is definitely a place for me here at HD, even though we may not have as much materially as some. I am grateful to learn from everyone here. Dick worked in HR for many years and I am happy for his success. He saw a lot and from his posts I know he cares deeply for the everyday people and how they will do in retirement. Chris
Dick, Everyone is unique. I would personally feel compelled to go back to work if I had to face retirement years with only 66% of previous income. Like you, our goal was to maintain lifestyle. Although some costs were markedly reduced when we began retirement, it certaily did not equal a third. Perhaps 15% overall. This first year entering retirement, we are spending way over 100%, doing things we’ve only dreamed of doing.
Over two years into my own retirement (and my husband is now on year six of his) I can say we are doing quite well on less than 100% of our (pre-retirement) incomes. How did our expenses decrease after retirement? House payments were cut in half. Property taxes were reduced by 75%. Our utility bills are probably 40% less than before.
I used to have to fill up my car with gas at least once a week when I commuted to work. Now that we live in a 55+ community–with a large retail hub located in the center of it–I put about five miles a week on my car.
As I’ve mentioned numerous times, we live a very. simple. lifestyle. We enjoy (and cherish) the simple basics. Our recent ‘date night’ consisted of going to the Dairy Queen (located in our community) and having cheeseburgers for dinner. They were delicious.
I know most people would probably describe our lifestyle as boring. But my husband and I have never been happier.
Kristine, our lifestyle has always been similar. The last 10 years before retirement we lived on substantially less than spouse made and got our “retirement” home then. It is different not having a regular income, though. Chris
Kristine, you make my point. You chose to make a major lifestyle change and relocate thus significantly lowering your expenses. Nothing wrong with that if it is a choice. If it had been a necessary change that would be different.
How well would you be doing if you did not want to move from your old hometown is the question?
I’ll respond to your question with a question of my own: If you had the choice to retire at age 55, but not had a second home (or made the choice to have your children pay their own way through college), would you have done it?
Kristine: if I may humbly jump in, I think you’re asking the wrong Quinn. Would CONNIE have been sadder at losing Richard much earlier vs enjoying more years in retirement together? Because Richard took a big risk in waiting: many people save and save, then die before they can retire.
She can only answer now – with the confidence of knowing the future. But I suspect she’d rather have Richard on a leaner budget vs a bigger nest egg alone.
The problem is that those pursuing safer nest eggs and die before retiring aren’t around to argue the risks and regret to Richard and the rest of us.
Pure confirmation bias – Richard got very lucky – so he can post here about the wisdom of waiting. If he died at 56-67, not so much.
Furthermore, if we wait until our nestegg can support 100% of our current income, we would have to work several more years only to end up leaving millions of dollars to our children. It doesn’t make sense.
Frankly I don’t think retirement at 65, 66 or so is a big risk nor would I describe living years in retirement from then as very lucky. The life expectancy at 60 vs 65 is only a two year difference. Plus Connie is four years older.
I retired when I did not based on finances, but primarily changes in the work environment.
Before I retired I had six weeks vacation plus 12 holidays. There was nothing really stopping our enjoyment. Connie didn’t care if I retired or not.
As an aside, the US can’t afford to have too many people retire in their 50s
I (we) made several significant choices in our lives impacting finances. Setting a retirement goal was not one of them.
As soon as we had our first child we decided they would go to college. When they were in high school we told them they could go to any college where they were accepted although we had no plan how finance that.
When I was 44 in 1987 we made the emotional but not practical decision to buy a vacation home.
I worked for one employer for nearly 50 years and Connie did not work outside the home, but volunteered quite a bit.
I had no desire to retire at 55 as I was just starting to achieve my career goals and I enjoyed my job. In fact, if there not had been personnel changes I probably would not have retired when I did.
More important I could not have afforded to retire at 55 as we were paying off college related debt for the next several years.
When I finally fully retired in 2010 our mortgages had been paid off several years before.
In theory, if we moved to Cape Cod we could save over $20,000 a year in taxes and HOA fees alone, but moving away from family was never going to happen.
Our choices were right for us and yours right for you. Our choices required high income replacement, yours less. No right or wrong.
You wanted out of the workforce at 55, I didn’t’. You want a quiet life, we enjoy activities and greatly miss traveling the US and the world. So be it.
Yep. I would never trade an extra 10 or 15 years working for a second home, a travel fund or paying for college (mine or anyone else’s). My favorite joke is the one that goes something like this: “What do you want to be when you grow up?” Answer: “Retired”.
You got me. I don’t know how to respond.
But the point is we didn’t want to stay in our hometown. We were miserable there. The only reason we stayed as long as we did was so that I could take advantage of a lucrative retiree health care benefit offered through my employer.
You would, no doubt, be miserable if you were forced to live how we do. You would be covered in dog slobber and dog hair on a daily basis. You would be forced to listen to the sounds of birds singing every morning as you walk those dogs for miles every morning. The most exciting vacation you would be planning would be to travel a couple hundred miles to attend a dog show for the weekend. You would be forced to prepare meals in a kitchen that still has ‘honey oak’ cabinets from (yikes!) the 1980’s.
That’s what i said. You made the best and right choice for you. In the process you lowered your expenses. My point was would you be as well off financially as you are now if you wanted to stay in Oregon? Could you have retired when you did?
Kristine, In many ways, I am jealous of your lifestyle. I would describe it as perfect for many, filled with joy and satisfaction! Lifestyle doesn’t have to be complicated to be rewarding.
Dick, it might be helpful to your argument if you are comfortable breaking down your own yearly expenditures to needs versus wants, i.e., what percent to you spend on overseas travel, a second home and family gifts such as the 529s, expenses that your average retiree does not have.
No more argument from me on this issue, but the things you mention are exactly my point (before I vowed not to make it any longer 😃).
That point was about maintaining one’s lifestyle in retirement the way it was before retirement, no cutting back, no getting by, no changes not desired, including keep spending on discretionary items. There was no major drop in our expenses at retirement, except somewhat less saving, but that was offset by travel. Also, our healthcare premiums went from $197 a month while working to over $2,000 today with Medicare.
Some of our expenses are not typical I admit, but again, it’s about maintaining lifestyle. We spend $30 a week to have our vacation home checked, $5,000 a year on landscaping, plus taxes, insurance and utilities, we contribute $1,100 a month to 529s -all discretionary of course.
It would be fair to say we do not need a second home, or to spend a few weeks in Florida each winter or even contribute to 529 plans, but need is not the point in my former argument, not being required to compromise on lifestyle is the point – at retirement or 25 years after.
I also argued for beginning retirement with an income cushion- more than you need to deal with inflation and extraordinary expenses.
We are very much not average retirees, but perhaps more average within the HD community. But my point is irrelevant to income, the dollars involved don’t matter.
Virtually everything we did before retirement we continue to do – except at this point overseas travel seems over.
Hope this clarifies my thinking.
Thank you, and especially for such a detailed response, though understand I wasn’t pushing for dollar amount disclosure!
I take your recommendation for 100% as coming from someone with a long background in HR benefits where you saw the anecdotal but also the big data through time. So I understand and agree with your recommendation based on the “average” retiree. This community seems to definitely skew high wage and considerable retirement accumulation, very knowledgeable and prepared for retirement. But if people can see your total and say, well he gives 15% of his money to family, 13% for travel, they might be able to add or subtract those from their own planning.
As you may know I don’t use spreadsheets nor do I use a budget, but you got me thinking so I got out a paper and pencil.
I figure we spend about 25% of our net after tax income on what most would call discretionary spending, but which we call maintaining lifestyle. That does not include ongoing costs to maintain a vacation home.
I don’t want to suggest planning by others should reflect my approach because my only planning was achieving an income goal based on our lifestyle.
Understood. And helpful!
In what possible way is maintaining a vacation home not a discretionary expense?
From Investopedia: “Discretionary expense – a cost that a business or household can survive without, if necessary.” Your vacation home is a want, not a need. It’s a luxury.
I imagine there are many things we can all do without, including a bag of Fritos or a tattoo, but of course a second home is a luxury. It was a luxury when we bought it.
We have had the home for 37 years so it is part of our routine spending.
I’m guessing the annual ongoing costs of the house add another 5% or so.
I answered this post before seeing your other one, Dick. ITA with what you said about a big cash cushion at retirement. I did this the last 5 years before spouse retired. It is helping to manage taxes this year. Chris
That would indeed be interesting.
Based on current trends, we will spend more in my first full year of semi-retirement. Since I have some “bonus” income, I’ve lost enthusiasm for playing financial defense in at least two areas: grocery shopping and eating out. Have not been vigilant about grocery prices and have been treating the kids regularly to meals out with little concern about the bills. Still spending well below our income though.
Hi Dick, this is Chris. I will bite. We retired in January. The year is half over. We are not taking SS yet, but will in Jan. This year we are living on about half what we made before retirement. The sources are a stock sale, part time work, vacation and bonus payouts. We also had some other savings but haven’t had to touch yet. The (small) pension starts next month. We are doing ok. We just got back from a cruise that I paid for last year. We are frugal and live simply.
I project next year when we start taking SS and distributions from 401k we will be at that 66% you talk about in your post. I think we will continue to be ok.
Out of curiosity, what are the big spending difference categories between the day before and day after you retired?
Your first year income doesn’t sound as recurring though.
I am not exactly sure what you are asking? Our health insurance went up since I went on Medicare and spouse on COBRA. Their employer had generously subsidized the health care. We don’t have a mortgage or any payments. I do sinking funds for the yearly things like insurances and property taxes. We still tithe, but it is less since the income is less. We are paying less taxes since our income is lower. Is this what you wanted to know? We still have a healthy emergency fund if needed and I have money saved for a new (used) car when we need. We haven’t touched any of our investments yet other than the stock sale of $23k. Keeping income low so we don’t have to pay capital gains on it. It has a very low basis. Chris