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With all that’s going on with SS (COLA, taxation, potential cuts) and some changes certain in the next six years, is it time to rethink the income replacement percentage you shoot for in retirement?
I won’t give my theory again, one or more of the Clements family will be upset with me😅
However, self preservation, a hedge against longevity, hence inflation and peace of mind still tells me that a goal of replacing 60, 70 or 80% of pre retirement income is not sufficient.
Pssst … it’s 100% of the income you were actually living on day to day before you retired. Trust me it’s comforting.
For my estimates the 80% of my pre retirement salary made sense: no longer incurring payroll taxes (7.65%), no state & city income taxes (approx 6.57%) on SS & pension, city income taxes were wages only, not contributing +15% of salary to 401k plan.
I ignored commuting/other work costs and simply viewed the above as reasonable approach to an 80% estimated need of pre retirement salary. Hard to argue with the math. Silly to bang the drum about 100%.
I realize the math as you noted says you need less than 100%. I also realize that many – most – people do not have 100% replacement, but that does not make it a less desirable goal.
Starting off at 80% leaves little room for error IMO. It also means there better be a solid plan to deal with inflation in the years ahead as that 80% value steadily declines. My 100% in 2010 sure isn’t the same in 2026.
Duly noted. Your ‘inflation beware’ advisement is duly noted.Thanks!
Inflation muddles the mind. Using less than 4% of total portfolio value yields greater than 100% of former salary is another math point, but it’s all inflated dollars.
Almost nothing engenders more thoughtful comment than a post by Mr. Quinn regarding post retirement income equalling 100% of your last paycheck. I say the more the merrier, however, I find my expenses much lower in retirement than during my working days. I had retirement thrust on me when I was 59, by Covid, and I’ve chosen not to go back to work since. My youngest, our 4th, also graduated from college in 2020. From that point going forward, I no longer had 6 cars, my car insurance was reduced by 75%, my phone bill similar, I paid off my mortgage, many other expenses reduced or disappeared, and so I wouldn’t need 100% of my income at retirement to get by. Interestingly, rather than looking to downsize, I really need to upsize. With two children now married, we need more room rather than less for large family gatherings. So much of these needs, rules of thumb, etc. depend on your personal circumstances and the timing of any children in your lives. But having 100% of your last paycheck in retirement would be a very good thing if you can do it because of the flexibility it would provide.
Our early retirement income goal is inflation adjusted 100% of working wage which includes joint social security (covering monthly fixed expenses) starting at 70.
Our retirement spending strategy to use max SS wage cap number (Unless congress eliminates the tax cap) as an inflation adjusted, income spending goal in retirement.
The SS tax wage cap is based on the National Average Wage Index (NAWI) vs. Consumer Price Index (CPI-U). The NAWI outpaces CPI-U by about 1%.
real purchasing power over time, rather than just keeping up with literal inflation.
Dick, I think rules of thumb are useful. But, as Rick Conner and Michael Perry have pointed out, they have limitations and are often specific to a person. I use them, but only after I’m satisfied that a more detailed analysis brings me to roughly the same conclusion. Take the “4% rule”, for example. There are variables in a person’s life that might make their actual safe withdrawal rate higher or lower, but 4% is a shortcut that probably gets most folks in the ballpark.
Maybe, at some point, you did some deep thinking about your income needs in retirement, and came to the conclusion that you might need–and would only be comfortable with–100% replacement of your base salary. That figure then became a good shortcut for you to aim for, without going through the hard thinking again.
But that doesn’t mean the same rule of thumb shortcut fits every family. Our own approach is to look at our actual spending over a past number of years, add on expected future expenses and fun money, plus a cushion. That helps us arrive at a figure that may not be exact, but is close enough. Thankfully, for us and you, we have options and resources to make it work in our favor.
My approach is indeed simplistic.
My considerations were that we did not want any change in lifestyle including discretionary spending. We had no intention of relocating to a lower cost area.
We still had to deal with unexpected expenses.
Inflation was going to erode our spending power.
What we might have saved from working spending like FICA and 401k contributions have more than been offset by added expenses liked health insurance premiums.
I saw no need for more detail. Our past spending was based on our past income. The future would be no different except nearly all fixed income.
We can’t predict expected future expenses so we wanted to be as certain as possible we could handle what comes at us. That includes helping family when necessary which has become a reality over the years through illness and job loss.
Aiming for a % of pre-retirement income implies that one expects their life and their spending to remain what it was when working. If it isn’t, that figure isn’t much use as a planning target, though having it can add some comfort. Even if it is the planning target, one could just as easily aim for the ability to generate that amount of income rather an income stream actually in place.
By way of example and not advice for anyone else, when we retired, we knew our spending wasn’t going to stay the same, so we didn’t aim for any % of working income. We estimated what our in retirement spending would be. Even then we didn’t aim to have an income in that estimated spending amount, but rather “some” income plus assets that could generate the remainder.
Knowing we could live as we were while working was a comfort/sanity check, but wasn’t the goal. So was knowing something like the 4% “rule” would work for us, whether we actually used it or not.
Our path was certainly not the only way to do it, and nor is X% of pre-retirement income, however defined.
We didn’t want to be in a position to compromise on our lifestyle at all. There was no reason to think we would spend less -.differently likely, but not less. That has been true for 16 years. That spending goes beyond necessities.
I also wanted an inflation cushion. No easier way to do the calculation than simply keep things going as always.
No calculation, just an assumption costs would always increase.
One other difference from many others is that we lived on one income our entire married life and our lifestyle was based on that. In addition, we lived on my base salary only, not total compensation. Any pay above salary was saved.
I can understand your thinking and it has clearly worked for you, but I don’t think it’s necessarily good advice for most.
Right, I don’t give advice, just food for thought. Conventional wisdom occasionally has alternatives.
Dick,
I think an excerpt from your post above bears amplification for our younger readers:
Your words: “One other difference from many others is that we lived on one income our entire married life and our lifestyle was based on that. In addition, we lived on my base salary only, not total compensation. Any pay above salary was saved.”
For those who are in a position to do so, living off salary alone (or a specific set point if base compensation is variable) and fighting the temptation to spend or increase the lifestyle when bonuses, equity distributions, perhaps inheritances, investment returns or other windfalls come their way is a great way to build long term wealth.
We did basically the same thing and used the variable compensation and any windfalls that came our way to pay off our home mortgage and stuff the kids’ 529’s full enough to cover their college tuitions. Retirement savings became “Job#1” when there was no longer a mortgage and the 529’s were topped off.
This approach gives us the option today to actually increase our lifestyle in retirement. I guess you could say- burning the candle on the latter end of adulthood vs living it up in early years when a bonus etc. came along. All that said, spending money is still not something we are very good at after living conservatively our whole lives but I would have never done it any other way.
Good point. My compensation the last five or so years before I retired was salary, cash bonus and a combination of stock options and incentive restricted stock awards. Base salary was less than half of total compensation in several years.
With one exception (I exercised some options for a house addition) all the pay above base was saved. I invested the cash and converted the options and restricted stock into shares in the company I worked for. For nearly 20 years I reinvested all dividends. Last years I started taking the cash because the shares were 40% of non qualified investments. Today those dividends are greater than my net (after all deductions) social security benefit. We still don’t use them but invest in a money market fund.
Some day we may need the cash or Connie may need the income, but for now it just keeps growing. The company is a utility and has paid dividends for over 120 years.
Don’t you see how these facts are incredibly specific to you? Someone else with the same wealth might have been remunerated on low basic but with high bonus and stock based comp. So your rule would probably undercook the lifestyle spend they could “afford”.
The key is understanding lifestyle spend NOT the shortcuts you took because you are a stubborn and maths-phobic person. It worked for you because of your hangups about budgets. Doesn’t mean that other people would not be better advised to have a more rounded analysis.
Okay. It still comes down to maximizing financial security in retirement no matter how long.
I like to keep it simple, at a high level. Others like detailed analysis perhaps trying to account for every contingency like the person who posted here once that she tracked every penny they spent.
‘My maths-phobic approach has served us well for 58 years and you still won’t find a budget or spreadsheet on my iPad.
As I have said before several times, save first, never have a credit card balance at the end of the month and spend the rest as you like. That’s the way we live in retirement too, except the save part is grandchildren’s 529 and reinvested interest and dividends.
I think you’ve posted that you do track perhaps more intensely than most – do I recall you saying that you checked bank/cc statements every day? Just because you don’t record it yourself and rely on records from financial institutions doesn’t mean you’re not doing a form of budgeting – just that it is in arrears.
And the reason your method is successful and you always have surplus is your extremely high income relative to your needs NOT because of the innate superiority of your method. Put yourself in the hypothetical position that you’d been made redundant 10 years before your eventual retirement and then had to scrape by in a succession of short term lower paid roles. How does your method stand up then?
I log on to my investments everyday, just out of habit. My bank sends automatic updates on account balances.
I make sure I stick with my theory, but there is no budget.
I see no difference between my method at any income level. It’s a forced way to live within one’s means, you can’t spend more than you have.
Of course, your example is an exception. There are always exceptions. In the example, it probably means a lower lifestyle, lower budget, lower everything regardless.
The challenge with the “percent of pre-retirement income” concept is that, as any frequent reader of HumbleDollar knows, the definition of pre-retirement income is too vague. Many of us stopped working full time prior to full retirement. I consulted part-time for 6 years before full retirement, while receiving a pension. My wife went part-time in her last year of work. If we tried to replace 100% of our peak combined income we would never have retired. And anyone that is “living on” 100% of their income should think hard about their readiness for retirement. Those of us with decent pensions are the exception to that consideration.
The key, as other commenters have pointed out, is having the financial resources to fund your lifestyle, accounting for future inflation and future large expenses. Controlling our expenses is one of the greatest levers any of us has in managing our retirement finances. There are many ways to approach this challenge. Luckily, this forum presents us with many great examples.
“The key, as other commenters have pointed out, is having the financial resources to fund your lifestyle, accounting for future inflation and future large expenses.”
Absolutely.
I tend to agree with Brother Quinn!
It’s sort of funny, but I am actually recieivng more income now that I am retired than I did the last years I was working.
My last 3-year contract as an academic was $105,000 annually. From that amount, I was maxing out my 403 (b) and paying income taxes as well. My “additional Income” from SS added $45,000, taxed at the maximum SS rate.
As a retired person, our SS is @73,000 annually, and our Annuity Income is $36,562… totaling $109,562. However, we are no longer contributing to a 403(b), and our taxes went from the 22% to the 10% bracket on much smaller taxable income. (72% of the annuity income is income tax-free.) Our additional income these days comes from 4% withdrawals from our Portfolio, totaling $1,956 monthly. Those are LTCGs, which are taxed at the 0% capital gains rate. So, all in all, we are making $133,034 annually… after Medicare Part B is deducted from our SS.
Our RMDs are QCDs, and life on earth is good!
Mike, even without significant annuity/pension income, this is our situation as well. For us it required diligent saving and my working (a job that I was lucky enough to enjoy) to age 70. I am curious, to what age did you work to achieve your good numbers?
We will be in the same situation when we claim social Security in 18 months.
Richard: This was my goal as well: “it’s 100% of the income YOU WERE ACTUALLY LIVING ON day to day before you retired.” Not the gross combined income that my wife and I were earning when we retired, but instead the (now) yearly inflation-adjusted pre-tax amount that we were actually spending at retirement, which reflected the way we actually live, including our normal spending patterns, taking yearly vacation trips, etc.
It has worked out very well for us after being retired now for 16 years (I retired at age 65 and my wife retired a year later at age 62).
I defined that as my base salary, we saved all other bonus and equity compensation.
Now that we are both retired, our spending has increased significantly over what we lived on while working. Some of this is inflation, some is Medicare and supplement premiums, and some is fun stuff. We are very grateful that our current income is equal to our working income, even before deductions for retirement savings.
But that final sentence in bbbobbins reply is a doozy; “an unattainable rule of thumb that would see them giving healthy years of their lives to work unnecessarily”. I worked until 70 at a job that I enjoyed; not everyone has a job like I did, one that provided me with eight months per year of nearly total vacation time. Many people would include their tax preparer (me) in their preparation for retirement. In an attempt to justify retiring, many had a tendency to understate their future spending needs. “Oh we can get by on this, we can cut down on that, I can get a part time job”.
The other big factor, at least in my mind, is our oft beaten to death topic, Social Security. The uncertainty of future SS benefits is probably another good argument for 100%.
At the end of the day, I don’t want to see people wasting healthy years working or being unhappily retired. Everyone will not require 100%, but they better be honest with themselves and plan very carefully. And obviously, the younger the retiree is, the more important this becomes.
I think we need to distinguish types of people/retiree
Let’s say we have Type A people – the kind you describe trying to justify a path to retirement they can’t quite afford. Probably through life they’ve made other suboptimal decisions like expensive debt on credit cards or inflated lease payments on a car they didn’t need. Probably have never thought about inflation conceptually so it’s always an adverse surprise and a “well how could we know” matter.
Then we have Type B people who have saved dilligently, know their expenses and what will change directionally. And they also know that the way to match or beat inflation is to have assets that outgrow it i.e. remain invested in “risky” equities.
IMO the solution is not to try to create a simple rule for the Type As and castigate the Type Bs for their risky behaviour by insisting the only mantra is “fix your income” at all costs. I’d suggest it is to turn the As into Bs through education etc and get them more comfortable bearing “risk” through retirement. And there may be objections of that will never work for some people. Sure that’s fine they can either go short in retirement or spend health and time capital working until they really have everything fixed because security is clearly worth more to them than living life.
I think that’s true, including myriad combinations of both A and B.
As others have said, this is a very individualized discussion that a lot of authors have tried to throw generic answers/calculators at. Once my husband shifted from a state agency to the private sector ten years ago, our income jumped sharply. We weren’t spending all of it, not even close, and we were never going to spend all of that as retirees. Replacing 100% of our highest income was never going to be either realistic or necessary. So for retirement planning, back in 2019, we built a spreadsheet (of sorts—I’m not very good at them) that details our actual spending (and update it at intervals). The goals has always been to marshal our sources of income (pensions, savings, SS in due course) so that we could comfortably maintain our spending.
We’ll have to keep adjusting as things change. For example, I’m still gathering information about the actual monthly costs of the home we moved into three months ago. Once we get a dog, he’ll go into the spending plan, too. I imagine that things like less travel and more health care costs will also factor in over time.
“Once we get a dog, he’ll go into the spending plan, too.”
True, but very possibly on the credit side of the ledger as well as the debit!
I’ll never be able to quantify it, but I’m convinced that every time Danny insistently hops around at the bottom of the stairs with the leash in his mouth to get us out for a walk, he lowers our long-term health care costs.
A dog or cat supposedly costs on average $1,000 a year for all expenses.
I think there are studies showing that petting a dog or cat actually can lower blood pressure! And, of course, the obvious benefit of needing to exercise a dog.
I’ve actually tried doing it. The presence of the dog while taking my blood pressure definitely does result in a significantly lower reading.
Couldn’t help yourself could you? 🙂
For what it’s worth
From Mike Piper’s Oblivious Investor newsletter today, which I highly recommend:
In a recent paper, David Blanchett found (again) that household spending tends to decrease over the course of retirement. That is, it increases, but not as quickly as inflation. So in “real” terms, it’s gradually going down.
Relative to Blanchett’s earlier work on how retirees change their spending over time, his latest paper had two particularly noteworthy findings.
Median vs MeanThe first especially interesting finding was the difference between the median and mean (average).
For the median retiree, inflation-adjusted spending decreases throughout retirement.
For the average (mean) retiree, however, inflation adjusted spending goes back up at older ages (though it still stays below the initial level of spending).
The difference appears to be significantly due to large health-related costs at older ages, which are included when calculating a mean, but which do not affect the median retiree. For example, as Blanchett writes, “among those who passed away at the age of 95, the median cumulative real lifetime unexpected out-of-pocket medical expenses were only about $50,000 compared to roughly $250,000 at the 95th percentile.”
Ah the old canard. Might just as well be called quack economics.
Your % may give YOU comfort but anyone who has read HD for any length of time knows you’ve massively overprovisioned for your retirement.
Thinking about in income terms alone is arguably dangerous because unless that income is inflation linked ultimately it is just guess work. What people need is not INCOME but ASSETS they can deploy flexibly to drawdown income while offering growth to offset inflation.
The other thing that people need the financial education to understand this and the basics of budgeting/appraising their needs. That is what should give them comfort and confidence. Not an unattainable rule of thumb that would see them giving healthy years of their lives to work unnecessarily.
Exceptionally wise comment.
I agree. I’ve been drawing from my IRA to supplement Social Security and two very small pensions, since I retired over 10 years ago. Thanks to market forces and a relatively frugal lifestyle, my IRA nest egg hasn’t diminished. I’m thinking more about Roth conversions and giving more generously to my heirs and charities sooner rather than after my death. Please, fellow writers and commenters, keep your ideas and comments coming! 😊
For us, it wasn’t replacing any specific % of working income, it was when our income streams would more than cover our expenses (yes, calculated with a … spreadsheet) and also allow us to continue to save each month. Our pensions have a COLA which has more than kept up with Medicare and other increased costs. My wife started receiving social security in February and all that goes into savings. So, we don’t anticipate needing to tap into our T-IRA, Roth IRA’s, or savings accounts in order to pay monthly bills. While I hope that our politicians do something positive to save social security with no benefits reduction, even if reduced benefits happen it won’t interfere with our retirement lifestyle.
Many articles discuss what percentage of income to replace. This may be useful when looking at large groups of households. But the percentage of gross income actually spent prior to retirement may vary considerably among different households. A more individualized approach is better.
I agree with you on not focusing on total income per se, but on that portion of income you actually spend. I accumulated enough to provide the cash to continue spending as before. Whatever percentage of my pre-retirement income that amount may be can be derived. And, in addition to annual inflationary adjustment in spending, don’t forget hedonic adjustment. A rough proxy for this is the annual Real GDP growth percentage. Jonathan among others discussed this.
These are ideal goals to shoot for but not everyone may achieve this. Some will need to downshift their spending in retirement. But aiming for a goal, and coming up short is preferable to not having a goal at all.
I totally agree that a more individualized approach is necessary. There are too many variables to use a rule of thumb approach.
I targeted 100% of my base salary, not total income because we did not live on total compensation. Our lifestyle was salary only.
You are right many will not be able to achieve such a goal, but still a valid quest because the alternative is what millions of seniors are now dealing with – cutting back because of prices, complaining about increasing property taxes as if that wasn’t to be expected as the cost of what local taxes pay for goes up as well.
If a person is age 50 they surely see the impact of inflation in various forms from prices to taxes.
Why would anyone retire and not realize none of that will change in the years ahead? All prices and at least property taxes will steadily increase over the years.
In our case I have been collecting a pension for 18 years with no COLA, but the pension plus our combined SS has provided a comfortable cushion against inflation. A suspect at some point that will no longer be true, but that’s where investment income can pick up the slack.
Even folks living on only investments might want to consider of pool of funds designated only to offset future price increases separate from the investment pool generating current income.
For people who retired in their 50s or early 60s the challenge is likely greater because of the time factor.
I think you’re in danger of trying to solve yesterday’s problem for a bunch of people in no position to do anything about it.
Q- What do old people complain about (as a generic population)?
A- Everything
While this isn’t actually true, if you spend your time trawling FB or other online forums looking for the complaints re retirement personal finance it’ll look like it.
The population you need to reach is the not at retirement yet people. And that’s where your philosophy falls down because your situation was incredibly non-comparable to people in their 40s and 50s today. They don’t need magic but they do need to take ownership of their expected spending needs to drive everything else. And for many people that means budgeting or tracking in some form.
Then they need to appraise their resources in order to fill those expected needs. Income sources, SS may be part of it but deployment of capital is ultimately a key part.
And let’s not forget the chance today of anyone going 30-35 years at the same company uninterrupted is probably close to zero.