Having sold my family’s business at 54, officially retired at 56, and unretired nine months later, I’m approaching retirement longer than I worked. My spending increased in early retirement. Twenty-five years retired now, we’re living on about 35% of my average income during my working years. That does not include Social Security. That will increase when we move to a CCRC, but not by much. The biggest variables are eating out and trips. I expect that will decrease with age.
Our retirement expenditures remained roughly unchanged (100%) from pre-retirement for the first 5 years, although expenditures are now creeping higher due to recent inflation. Costs for travel and helping our adult kids replaced work, commuting, and college expenses. Expenditures as a percent of salary has been perhaps 70% as we saved quite a lot approaching retirement.
Youza! So, the day you retire you can live the rest of your life on 50% of what you earned the day before? If you earned a million a year, I get it, but let’s say it was more like $80,000.
Yeah, I misunderstood that, but my point is the same. It’s all about expenses, not pre-retirement income.
By the way, many people can live comfortably on $40,000. My wife’s uncle and aunt are in their eighties, each with health issues with medical expenses, and they told me they spent $40,000 in 2023. They live in a large home in a high cost of living area in a suburb of St. George, Utah. They don’t do much but play Dominoes these days, but they are very happy. They made a lot of money in their working years as general contractors and ranchers, so they’re living on a fraction of their pre-retirement income.
I think the question is better understood as what percentage of your salary you need at the outset of retirement. That value, in actual dollars, would need to be adjusted for inflation each year.
That seems arbitrary, since you don’t know what inflation will be over a potentially 30 year retirement. Also, some people may be just getting by on 100% while others (like the OP) only need 50%. One size does not fit all.
That’s my point, we don’t know what inflation will be, but we know it will be. My buying power has dropped by 40% since I retired. What I don’t understand is what spending drops away at retirement to get to 50% that is not replaced by other different spending, including discretionary.
Perhaps if one was saving 30-40% of pay. Even paying off a mortgage won’t be that big of a drop for most.
I was saving 10% of pay. Now I save for emergencies about 3%. On the other hand just before I retired our health insurance premiums were $197 per month for two. Today they are more than $1,000.
I’ve always saved 20-30%. My mortgage payment was usually about 20% of gross pay, which is now paid off. SS tax at 7.65% goes away. My five kids are now launched. I can live easily on 50% of gross pay without a drop in my standard of living.
First, congratulations. However, you are clearly above the norm in both savings and I suspect from what you said, high on the income ladder as well. The great majority of Americans could not do that.
I couldn’t especially sending four children through college.
In any case, to my point. According to the Federal Reserve Bank of St. Louis, the personal saving rate in the U.S. was 3.2%as of March 2024. This refers to the average percentage of income Americans set aside for their savings. American households kept an average of $62,410 in their transaction accounts in 2022.May 13, 2024
Our household gross income is currently about $150,000. We can have a very nice retirement on $75,000. I don’t think there’s anything too outlandish or unusual about those numbers. If I work until I can replace 100% of our current income, I’d probably have to work another ten years.
A word to the wise: You’re never going to change Dick Quinn’s mind. Countless commenters — including me — have said they can retire comfortably on far less than 100% of their pre-retirement income, but Dick isn’t buying it.
You’re right, but in my defense, it’s 100% of base pay or salary, not income which can be different. And while that income may initially exceed needs, it provides a cushion for inflation and unexpected financial needs or desires.
Plus, the ability to live on far less than 100% is highly dependent on income level – easier the higher income
“Doesn’t your income at any point determine how much you can spend?” Not at all. Your income when working has nothing to do with how much you can spend in retirement.
How much does a former professional athlete need for a comfortable retirement if their salary in their final year was $5M? Apparently, your answer would be $5M per year. My answer would be “it depends on their expenses”.
Haha. Got it. I actually think we’ll end up spending in retirement closer to 40% of our current income. 50% is padding because health insurance premium is a wild card.
Even though my pension has no COLA, I expect income (in $) to increase during retirement due to SS COLAs and eventually RMDs, if nothing else. Yes, at some point years down the road, our passive income in raw dollars should consistently exceed 100% of my final salary, even though the buying power will be considerably less. Does that meet your model’s specifications? For current spending in retirement though, we only need 50-60% of my final salary–that was my point.
My goal was not to get rich per se, but to achieve financial independence. When I finished my residency in 1988, having been influenced by my dad, Bogle and others, I began “paying myself first”. I automatically moved 10% of our gross pay each month into a taxable account (part went to cash for an emergency fund, the rest toward early payoff of student loans; and once repaid, most went into stocks). I also invested the maximum allowed into my group’s retirement plan. Altogether, I invested about a third of our gross annually. Critically, it was that amount which remained, after taxes, that determined the cost of our lifestyle. Rather than rely on some formula to determine what I’d need once retired, it seemed preferable to know precisely what our annual expenditures were while still working, and aim to fund our household budget by that same amount in retirement, adjusted annually for inflation. This annual budget by the way includes not only expenditures but numerous virtual escrow amounts funded monthly for unpredictable but inevitable future expenses such as major home repairs, automobile replacement and so forth, plus six 529 plans. The annual gross dollar amount withdrawn from my nest egg, which when combined with social security benefits, and after deducting estimated federal and state taxes, to fully fund the budget was thus determined. That gross amount divided by 0.03 (a modified “3% rule” to provide a margin of safety) determined my “Number”. A critical caveat: both while employed, and now retired for six years, is that we had to adapt our lifestyle to fit the dollar amount allowed by our planning, not the other way around. Some prefer or think they “deserve” a higher cost lifestyle, and adjust their investment planning around it. I prefer peace of mind. I only mention what worked for me, not to give advice to others. I have gifted books by Jonathan and Bill Bernstein to many. For a few close family members, none near retirement yet, I suggest they calculate their current annual cost of living, and imagine how they might fund that once retired between their social security and investments. It might reveal to them why experts always urge people to start early. And, it might stimulate some to look for areas of spending they can trim to allow for more efficient use of their income and perhaps provide a bit more for investing.
For me the percentage of pre-retirement salary was irrelevant, but rather the key was knowing how much monthly income we needed to comfortably maintain our lifestyle. Fortunately my wife and I had fine tuned managing our household budget for years so going into retirement we had a high degree of confidence that we knew what income level we needed and we were already managing our household budget to that number. By doing that, when we retired “nothing changed” on how we managed the household budget. Also, we didn’t retire until our guaranteed monthly income level significantly exceeded the required level to cover all our household expenses, our travel budget, and personal discretionary funds. Six years into retirement this has worked well for us.
Same here. Also, for planning purposes I kept track of expenses paid by my employer such as health care insurance premiums, and included these in our household budget as expenses we would need to pay for once retired. As a first approximation, our annual spending once retired would continue on as before, increasing annually with inflation.
Many people “retire” earlier than anticipated, me among them. For own health issues or caretaking of others.
in such an instance, having 100% of your net preretirement income each month is very helpful. I know that’s been my experience,
I think using net not gross helps, and especially if saving aggressively (maxing out 401(k) for instance) in working years it means needing a smaller nest egg to support your anticipated expenses. This calculation does require planning your net retirement income too, after taxes, insurance, and any other obligations.
I think a better question is what are your expected expenses? This avoids the issue with using gross vs. net income and several other issues when trying to calculate a percent of one’s salary needed for a comfortable retirement. Using expenses is more simple. For example, I have tracked my expenses for the past three years with Personal Capital (Empower now) and have averaged $45k. Thus, I can easily calculate using 25x expenses (4% rule) that I will need roughly $1,125,000 for retirement or to be more conservative, I can use the 33x expenses (3% rule) and will need roughly $1,500,000. I can then just add lets say $20k to my current expenses for travel and other unexpected expenses. Thus, if I add $20k to my current average yearly expenses of $45k, then I will need approximately $65k per year in retirement. Using a conservative 3% withdrawal in retirement, then I will need approx. $2,166,666 ($65,000 / 0.03). Of course, I am ignoring social security (I won’t have a pension), so my necessary savings is less. I am also ignoring inflation and thus will need to adjust my necessary retirement savings pending how inflation affects me personally. However, inflation, social security, and pension are all things that need to be considered whether one is using a % of salary or tracked expenses.
If I use a % of my salary (mine and wifes), then I need to first calculate what percent I spend vs. save and then decide whether to use gross or net income. One can easily do this too, but I find using expenses is more simple and straightforward. Of course, I am at least 10 years from retiring and plan to continue to track my expenses and make adjustments as needed. Just my 2 cents 🙂
You probably cannot predict this. Some say 80%, some less like 60%, I say plan on 100%. Remember the math rule of 72, divide by a number like 10 and then in 7.2 years your investment doubles. Will in retirement your money goes the opposite way. 4% inflation means in 18 years you will need twice as much to equal your original amount. Your friend is compounding and your enemy is inflation. For me, I am spending more than 100% of salary and in Retirement at Independent Living, I never expected that. Do your best to save more than 100%.
I really didn’t know how much I needed to retire until a few years before retiring, when I really started to think about things. I didn’t need to save enough to replace my gross pay but just my net, or take home pay. That turned out to be a lot easier in my case. I was single and debt free, house paid off, no loans, and I paid off my credit card bill every month. When I retired I would no longer have to pay towards Social Security or my 401K, just federal, state and local taxes.
At my company(AT&T), I had the choice of a lump sum or pension. Most people did the lump sum which is what I was going to do until I really took the time to thing about it, six months before retiring, and went with the pension. I waited until my full SS age to retire. With another small pension from a job I had with the City of Milwaukee and Social Security I bring home almost the same take home pay I had when working. I’m using my 401K to make up for inflation since my AT&T pension is fixed. My City pension and SS have cost of living adjustments. The majority of my pay is not correlated with the stock market. The way God worked it out I even get paid twice a month just like when I was working.
I’m glad I didn’t retire early and waited until my full SS age. Having the same take home pay really makes retirement fun.
What counts is your expected expenditure, not your pre-retirement income. I retired on much less than my final salary, but I did not need to change my life-style as I was spending less than I earned. If you are spending more than your income you can’t aford to retire at all, if you are spending close to 100% you need to consider whether you will pay off your mortgage, stop saving for retirement and see your taxes decline.
To some degree it depends on how well you traveled the road prior to retirement. We were debt free years before retirement, and are also lucky to live in a very low cost part of the country. All of our spending amounts to about 62% of our current income. Our current income is about equal to our pre-retirement income. A little planning went a long way for us.
Obviously there is no single ‘correct’ answer to this question (sorry Mr. Quinn). There are so many variables to be accounted for. Are you a saver or a spender? Do you have a pension or not? Are you a traveller or a homebody? Are you introverted or extroverted? Are you willing to move to a new location in retirement or do you want to stay in place? Are you going to try and spend every last penny you have or do you want to leave a portion of your wealth behind when you die? The list goes on and on and on.
My husband and I live (in retirement) on less than what we made in our final years of employment. But we have pensions that come with cost-of-living increases, rental income and a nice Social Security benefit since my husband waited until he was 70 to claim it. Our expenses are lower than they were when we were working mostly because we moved from an area of the country with a relatively high cost-of-living to an area with a relatively low one.
Of course, ‘comfortable’ is also a relative term. What one person considers ‘comfortable’ another will likely see as ‘not so comfortable’.
An interesting topic for sure, but one that I just can’t imagine coming with any set answer.
During the working years, my wife and I were frugal savers investing about 20% of my gross pay. We planned to replace 100% of pre-retirement income. When I retired in 2021, we found we needed about 65% and once my wife passed, that dropped again to about 50%. In all cases we lived a comfortable lifestyle that did not change much in retirement.
Our first year of retirement was an adjustment year – nothing was typical. Some months we dined out more, entertained more, or just plain spent more money because we could. The key was living frugal before retirement so that we had the funds to be able to spend when we wanted.
Those spending rates refer to typical spending, and do not include the occasional thrill of a water heater, central AC, or whatever, needing replacement. The same caveat goes for planned travel, gifting for the grandkids college funds, etc. Those rates also consider that we are debt free in retirement.
After retirement, we downsized and our expenses came down. It is about 60% of final salary after taxes. Passive income is 80% of salary (both after taxes). I think this cushion will cover inflation increases at least over the next decade. Hence I would say 80% of final salary is a good place to start, assuming you downsize and cut expenses when you retire. If not, you will need to aim for higher % or be prepared to dip into your nest egg in the future.
This is a loaded question. The answer is “it depends”. In my retirement scenario, I no longer pay into a 401(k) account. I have reduced how much money that is withheld for both state and federal taxes. While I do have to pay for Medicare, I don’t have pay for company-sponsored health care, which cost more than Medicare. But, then again, my medical expenses have increased as I’ve gotten older. I’ve read several guides that recommend 80% of final salary as the goal for retirement draws, and I agree this might be a reasonable goal – but someone’s goal for travel, hobbies, or other activities in retirement might impact that number.
This is our first year of retirement. Prior to retiring we were living on roughly 80% of our take home pay, which will be our expected burn rate moving forward (inflation adjusted). However, I admit we will likely spend closer to 100% (or more) the first 2 years due to increases in travel and charitable giving.
We have tracked our expenses in retirement for 17 years. We aren’t extravagant but live very comfortably. While some expenses have decreased, others have increased considerably. we need an amount very close to our final salary, to maintain our lifestyle in our home of 37 years, as at this stage we need to outsource all labor related tasks. There are also much higher health care costs. And we live in a high property tax state.
As a retirement planning target I found “salary” too narrow, and confusing, leading to more questions. And in discussions it rapidly leads to misunderstanding and upset because it can mean and include different things for each person.
This is an easier question to answer with visceral clarity if you focus not on final base gross salary but rather on take home pay. This is the portion of income — from any source — which routinely covers your monthly and annual living expenses, discretionary spending, non-retirement savings, and charitable giving while working.
Take home pay is already net of taxes, which change for most people once retired. It also doesn’t include retirement savings which you’ll no longer need. That gives the best starting point for planning because it supports something you already understand well: the cost of your routine way of living on the day you’ll kick the paycheck habit.
If you’re not planning major reductions from housing costs or other big expenses, and do not wish to live a different lifestyle, aim for 100% of take home pay. Add to that certain changes to expenses, like healthcare insurance premium changes. Those costs usually rise in retirement, even if you retire at or after 65. Add in any other big new items like travel or new savings for large, irregular expenses, and you’ll have your retirement take home pay.
From there you can easily calculate your retirement tax rates to get your gross retirement income. Remember that most Social Security income is taxed for many people so you’ll need to consider your specific situation.
We’ve managed to keep our fixed costs relatively low, but our discretionary expenses, which includes travel, hobbies and watching live music/entertainment shows, are on the higher side. As of 2 years ago, we were living in a modest-sized paid-off house. The low property tax and utility bills helped to cap our total average annual expenses to about 30% of our pretax gross earned income. As such, our federal income tax was higher than our living costs and discretionary expenses combined.
In 2022, we moved to a bigger and older house, and consequently our fixed costs have risen considerably since then, thanks to the higher property tax, utilities, maintenance costs and frequent repair needs. We also traveled extensively in recent months. This has pushed up our total expenses in the past 12 months to over 75% of our combined gross salaries. Frankly, I was sweating a bit about the sudden jump, but I’m hoping to get it down to about 60% moving forward – a level I can sustain for some time.
Very difficult question to answer because people have such disparate visions of what they’d like their retirement to be like. I’m fortunate to have been able to plan for substantial labor-free income and have a family with modest material ambitions. Together, these should allow me to do “the little things I like to do,” like listening to rock-and-roll oldies, walking hand-in-hand to our favorite coffee shop (and reading the Monday edition of Barron’s on Saturday morning!).
I think my wife and I will be able to wind down our labor-intensive work with patients and still manage a lifestyle suitable to our desire for ample entertainment and travel to renew old friendships. Although our fixed and discretionary expenses are modest relative to our retirement income, I do not have disability insurance and want to be prepared for any health calamity. Ultimately, I want to have enough “left over” to ensure that our son can live as free from want and an alienating career as my parents and grandparents ensured for me.
My pension plus our SS benefits exceed 100% of my base salary which is what we lived on when working.
Our spending – after taxes- while different is not less and that includes spending on family, including 529 plans, various forms of travel. It also includes charity giving and modest savings.
Some months we spend it all, some not. If not it builds up for unplanned spending like the $3,000 on car repairs i will pay tomorrow.
The cushion we have allows for inflation too.
Is 100% necessary? Probably not, but i would not want cut it too close at less than 80% especially if i didn’t have a pension.
This is a hard one for me to answer as my work income declined in later years as I gradually reduced my hours and workload to effect a “glide” into retirement.
But I can speak to our expense level. I think it’s actually declined a little, thanks to reduced car expense (I had a fairly long commute), clothes and dry cleaning (I wore a suit every day), business lunches, etc. I’m sure that’s not true for many folks as they may have increased spending on travel and, later on, possibly medical and long term care expenses during retirement. But we haven’t traveled a lot and, so far at least, have been pretty healthy.
I calculated that our core expenses took up 30% of my final salary the year I retired (2023). That includes real estate taxes but not federal/state. It also does not include charitable giving. Our household income was not particularly high, by the way. Having a paid off house helps. I think 50% would be fine based on our spending habits. Sorry, Mr. Quinn.
Youza! Since i retired my pension has so far lost 40% of its buying power. Relying on investments may have offset some of that, but on the other hand perhaps not.
I don’t think there’s a number for me. Knock on wood, by the time I retire, I’ll have saved enough to where an external income is not necessary. What will be important is filling my days with meaning–if some cash comes along with that, I’d be fine with that too.
I suppose merely having enough income to match my expenses would provide the psychological benefit of not having to tap my savings.
Having sold my family’s business at 54, officially retired at 56, and unretired nine months later, I’m approaching retirement longer than I worked. My spending increased in early retirement. Twenty-five years retired now, we’re living on about 35% of my average income during my working years. That does not include Social Security. That will increase when we move to a CCRC, but not by much. The biggest variables are eating out and trips. I expect that will decrease with age.
Our retirement expenditures remained roughly unchanged (100%) from pre-retirement for the first 5 years, although expenditures are now creeping higher due to recent inflation. Costs for travel and helping our adult kids replaced work, commuting, and college expenses.
Expenditures as a percent of salary has been perhaps 70% as we saved quite a lot approaching retirement.
About 50%
Youza! So, the day you retire you can live the rest of your life on 50% of what you earned the day before? If you earned a million a year, I get it, but let’s say it was more like $80,000.
Yes. Adjusted for inflation annually, of course. $80,000 is much more than we’d need.
My example was if a person earned $80,000 could they live on $40,000?
Yeah, I misunderstood that, but my point is the same. It’s all about expenses, not pre-retirement income.
By the way, many people can live comfortably on $40,000. My wife’s uncle and aunt are in their eighties, each with health issues with medical expenses, and they told me they spent $40,000 in 2023. They live in a large home in a high cost of living area in a suburb of St. George, Utah. They don’t do much but play Dominoes these days, but they are very happy. They made a lot of money in their working years as general contractors and ranchers, so they’re living on a fraction of their pre-retirement income.
Where I live in the country property taxes alone would easily equal 30% or more of that income.
It may for them too and they live comfortably on the other 70%.
I think the question is better understood as what percentage of your salary you need at the outset of retirement. That value, in actual dollars, would need to be adjusted for inflation each year.
One of the reasons I argue for 100% of base salary. A cushion against inflation.
That seems arbitrary, since you don’t know what inflation will be over a potentially 30 year retirement. Also, some people may be just getting by on 100% while others (like the OP) only need 50%. One size does not fit all.
That’s my point, we don’t know what inflation will be, but we know it will be. My buying power has dropped by 40% since I retired. What I don’t understand is what spending drops away at retirement to get to 50% that is not replaced by other different spending, including discretionary.
Perhaps if one was saving 30-40% of pay. Even paying off a mortgage won’t be that big of a drop for most.
I was saving 10% of pay. Now I save for emergencies about 3%. On the other hand just before I retired our health insurance premiums were $197 per month for two. Today they are more than $1,000.
I’ve always saved 20-30%. My mortgage payment was usually about 20% of gross pay, which is now paid off. SS tax at 7.65% goes away. My five kids are now launched. I can live easily on 50% of gross pay without a drop in my standard of living.
First, congratulations. However, you are clearly above the norm in both savings and I suspect from what you said, high on the income ladder as well. The great majority of Americans could not do that.
I couldn’t especially sending four children through college.
In any case, to my point. According to the Federal Reserve Bank of St. Louis, the personal saving rate in the U.S. was 3.2%as of March 2024. This refers to the average percentage of income Americans set aside for their savings. American households kept an average of $62,410 in their transaction accounts in 2022.May 13, 2024
Our household gross income is currently about $150,000. We can have a very nice retirement on $75,000. I don’t think there’s anything too outlandish or unusual about those numbers. If I work until I can replace 100% of our current income, I’d probably have to work another ten years.
A word to the wise: You’re never going to change Dick Quinn’s mind. Countless commenters — including me — have said they can retire comfortably on far less than 100% of their pre-retirement income, but Dick isn’t buying it.
You’re right, but in my defense, it’s 100% of base pay or salary, not income which can be different. And while that income may initially exceed needs, it provides a cushion for inflation and unexpected financial needs or desires.
Plus, the ability to live on far less than 100% is highly dependent on income level – easier the higher income
Income while working has very little to do with how much someone needs in retirement. It’s all about expenses.
I answered the OP’s question directly, but it’s really not the right question.
Doesn’t your income at any point determine how much you can spend? How easy is it to predict one’s expenses for 20 years of retirement?
Wouldn’t it be more desirable to begin retirement knowing there was no need to look at every expense, even to look for what can be trimmed?
My expenses after 14 years retired have changed significantly, but have not declined including discretionary spending.
We live exactly as we did when I worked, but spend more on travel. Our mortgage was paid off years before I retired.
“Doesn’t your income at any point determine how much you can spend?”
Not at all. Your income when working has nothing to do with how much you can spend in retirement.
How much does a former professional athlete need for a comfortable retirement if their salary in their final year was $5M? Apparently, your answer would be $5M per year. My answer would be “it depends on their expenses”.
Haha. Got it. I actually think we’ll end up spending in retirement closer to 40% of our current income. 50% is padding because health insurance premium is a wild card.
Boggles my mind.
Even though my pension has no COLA, I expect income (in $) to increase during retirement due to SS COLAs and eventually RMDs, if nothing else. Yes, at some point years down the road, our passive income in raw dollars should consistently exceed 100% of my final salary, even though the buying power will be considerably less. Does that meet your model’s specifications? For current spending in retirement though, we only need 50-60% of my final salary–that was my point.
My goal was not to get rich per se, but to achieve financial independence. When I finished my residency in 1988, having been influenced by my dad, Bogle and others, I began “paying myself first”. I automatically moved 10% of our gross pay each month into a taxable account (part went to cash for an emergency fund, the rest toward early payoff of student loans; and once repaid, most went into stocks). I also invested the maximum allowed into my group’s retirement plan. Altogether, I invested about a third of our gross annually. Critically, it was that amount which remained, after taxes, that determined the cost of our lifestyle. Rather than rely on some formula to determine what I’d need once retired, it seemed preferable to know precisely what our annual expenditures were while still working, and aim to fund our household budget by that same amount in retirement, adjusted annually for inflation. This annual budget by the way includes not only expenditures but numerous virtual escrow amounts funded monthly for unpredictable but inevitable future expenses such as major home repairs, automobile replacement and so forth, plus six 529 plans. The annual gross dollar amount withdrawn from my nest egg, which when combined with social security benefits, and after deducting estimated federal and state taxes, to fully fund the budget was thus determined. That gross amount divided by 0.03 (a modified “3% rule” to provide a margin of safety) determined my “Number”. A critical caveat: both while employed, and now retired for six years, is that we had to adapt our lifestyle to fit the dollar amount allowed by our planning, not the other way around. Some prefer or think they “deserve” a higher cost lifestyle, and adjust their investment planning around it. I prefer peace of mind. I only mention what worked for me, not to give advice to others. I have gifted books by Jonathan and Bill Bernstein to many. For a few close family members, none near retirement yet, I suggest they calculate their current annual cost of living, and imagine how they might fund that once retired between their social security and investments. It might reveal to them why experts always urge people to start early. And, it might stimulate some to look for areas of spending they can trim to allow for more efficient use of their income and perhaps provide a bit more for investing.
For me the percentage of pre-retirement salary was irrelevant, but rather the key was knowing how much monthly income we needed to comfortably maintain our lifestyle. Fortunately my wife and I had fine tuned managing our household budget for years so going into retirement we had a high degree of confidence that we knew what income level we needed and we were already managing our household budget to that number. By doing that, when we retired “nothing changed” on how we managed the household budget. Also, we didn’t retire until our guaranteed monthly income level significantly exceeded the required level to cover all our household expenses, our travel budget, and personal discretionary funds. Six years into retirement this has worked well for us.
Same here. Also, for planning purposes I kept track of expenses paid by my employer such as health care insurance premiums, and included these in our household budget as expenses we would need to pay for once retired. As a first approximation, our annual spending once retired would continue on as before, increasing annually with inflation.
Each family’s situation unique.
Many people “retire” earlier than anticipated, me among them. For own health issues or caretaking of others.
in such an instance, having 100% of your net preretirement income each month is very helpful. I know that’s been my experience,
I think using net not gross helps, and especially if saving aggressively (maxing out 401(k) for instance) in working years it means needing a smaller nest egg to support your anticipated expenses. This calculation does require planning your net retirement income too, after taxes,
insurance, and any other obligations.
Minus what you are investing from what you take home and you will then need the rest… You’d be surprised how expensive retirement is…
I think a better question is what are your expected expenses? This avoids the issue with using gross vs. net income and several other issues when trying to calculate a percent of one’s salary needed for a comfortable retirement. Using expenses is more simple. For example, I have tracked my expenses for the past three years with Personal Capital (Empower now) and have averaged $45k. Thus, I can easily calculate using 25x expenses (4% rule) that I will need roughly $1,125,000 for retirement or to be more conservative, I can use the 33x expenses (3% rule) and will need roughly $1,500,000. I can then just add lets say $20k to my current expenses for travel and other unexpected expenses. Thus, if I add $20k to my current average yearly expenses of $45k, then I will need approximately $65k per year in retirement. Using a conservative 3% withdrawal in retirement, then I will need approx. $2,166,666 ($65,000 / 0.03). Of course, I am ignoring social security (I won’t have a pension), so my necessary savings is less. I am also ignoring inflation and thus will need to adjust my necessary retirement savings pending how inflation affects me personally. However, inflation, social security, and pension are all things that need to be considered whether one is using a % of salary or tracked expenses.
If I use a % of my salary (mine and wifes), then I need to first calculate what percent I spend vs. save and then decide whether to use gross or net income. One can easily do this too, but I find using expenses is more simple and straightforward. Of course, I am at least 10 years from retiring and plan to continue to track my expenses and make adjustments as needed. Just my 2 cents 🙂
You probably cannot predict this. Some say 80%, some less like 60%, I say plan on 100%. Remember the math rule of 72, divide by a number like 10 and then in 7.2 years your investment doubles. Will in retirement your money goes the opposite way. 4% inflation means in 18 years you will need twice as much to equal your original amount. Your friend is compounding and your enemy is inflation. For me, I am spending more than 100% of salary and in Retirement at Independent Living, I never expected that. Do your best to save more than 100%.
I really didn’t know how much I needed to retire until a few years before retiring, when I really started to think about things. I didn’t need to save enough to replace my gross pay but just my net, or take home pay. That turned out to be a lot easier in my case. I was single and debt free, house paid off, no loans, and I paid off my credit card bill every month. When I retired I would no longer have to pay towards Social Security or my 401K, just federal, state and local taxes.
At my company(AT&T), I had the choice of a lump sum or pension. Most people did the lump sum which is what I was going to do until I really took the time to thing about it, six months before retiring, and went with the pension. I waited until my full SS age to retire. With another small pension from a job I had with the City of Milwaukee and Social Security I bring home almost the same take home pay I had when working. I’m using my 401K to make up for inflation since my AT&T pension is fixed. My City pension and SS have cost of living adjustments. The majority of my pay is not correlated with the stock market. The way God worked it out I even get paid twice a month just like when I was working.
I’m glad I didn’t retire early and waited until my full SS age. Having the same take home pay really makes retirement fun.
What counts is your expected expenditure, not your pre-retirement income. I retired on much less than my final salary, but I did not need to change my life-style as I was spending less than I earned. If you are spending more than your income you can’t aford to retire at all, if you are spending close to 100% you need to consider whether you will pay off your mortgage, stop saving for retirement and see your taxes decline.
To some degree it depends on how well you traveled the road prior to retirement. We were debt free years before retirement, and are also lucky to live in a very low cost part of the country. All of our spending amounts to about 62% of our current income. Our current income is about equal to our pre-retirement income. A little planning went a long way for us.
Obviously there is no single ‘correct’ answer to this question (sorry Mr. Quinn). There are so many variables to be accounted for. Are you a saver or a spender? Do you have a pension or not? Are you a traveller or a homebody? Are you introverted or extroverted? Are you willing to move to a new location in retirement or do you want to stay in place? Are you going to try and spend every last penny you have or do you want to leave a portion of your wealth behind when you die? The list goes on and on and on.
My husband and I live (in retirement) on less than what we made in our final years of employment. But we have pensions that come with cost-of-living increases, rental income and a nice Social Security benefit since my husband waited until he was 70 to claim it. Our expenses are lower than they were when we were working mostly because we moved from an area of the country with a relatively high cost-of-living to an area with a relatively low one.
Of course, ‘comfortable’ is also a relative term. What one person considers ‘comfortable’ another will likely see as ‘not so comfortable’.
An interesting topic for sure, but one that I just can’t imagine coming with any set answer.
During the working years, my wife and I were frugal savers investing about 20% of my gross pay. We planned to replace 100% of pre-retirement income. When I retired in 2021, we found we needed about 65% and once my wife passed, that dropped again to about 50%. In all cases we lived a comfortable lifestyle that did not change much in retirement.
Our first year of retirement was an adjustment year – nothing was typical. Some months we dined out more, entertained more, or just plain spent more money because we could. The key was living frugal before retirement so that we had the funds to be able to spend when we wanted.
Those spending rates refer to typical spending, and do not include the occasional thrill of a water heater, central AC, or whatever, needing replacement. The same caveat goes for planned travel, gifting for the grandkids college funds, etc. Those rates also consider that we are debt free in retirement.
After retirement, we downsized and our expenses came down. It is about 60% of final salary after taxes. Passive income is 80% of salary (both after taxes). I think this cushion will cover inflation increases at least over the next decade. Hence I would say 80% of final salary is a good place to start, assuming you downsize and cut expenses when you retire. If not, you will need to aim for higher % or be prepared to dip into your nest egg in the future.
This is a loaded question. The answer is “it depends”. In my retirement scenario, I no longer pay into a 401(k) account. I have reduced how much money that is withheld for both state and federal taxes. While I do have to pay for Medicare, I don’t have pay for company-sponsored health care, which cost more than Medicare. But, then again, my medical expenses have increased as I’ve gotten older. I’ve read several guides that recommend 80% of final salary as the goal for retirement draws, and I agree this might be a reasonable goal – but someone’s goal for travel, hobbies, or other activities in retirement might impact that number.
This is our first year of retirement. Prior to retiring we were living on roughly 80% of our take home pay, which will be our expected burn rate moving forward (inflation adjusted). However, I admit we will likely spend closer to 100% (or more) the first 2 years due to increases in travel and charitable giving.
We have tracked our expenses in retirement for 17 years. We aren’t extravagant but live very comfortably. While some expenses have decreased, others have increased considerably.
we need an amount very close to our final salary, to maintain our lifestyle in our home of
37 years, as at this stage we need to outsource all labor related tasks. There are also much higher health care costs. And we live in a high property tax state.
Yeah, Marjorie. Us too.
As a retirement planning target I found “salary” too narrow, and confusing, leading to more questions. And in discussions it rapidly leads to misunderstanding and upset because it can mean and include different things for each person.
This is an easier question to answer with visceral clarity if you focus not on final base gross salary but rather on take home pay. This is the portion of income — from any source — which routinely covers your monthly and annual living expenses, discretionary spending, non-retirement savings, and charitable giving while working.
Take home pay is already net of taxes, which change for most people once retired. It also doesn’t include retirement savings which you’ll no longer need. That gives the best starting point for planning because it supports something you already understand well: the cost of your routine way of living on the day you’ll kick the paycheck habit.
If you’re not planning major reductions from housing costs or other big expenses, and do not wish to live a different lifestyle, aim for 100% of take home pay. Add to that certain changes to expenses, like healthcare insurance premium changes. Those costs usually rise in retirement, even if you retire at or after 65. Add in any other big new items like travel or new savings for large, irregular expenses, and you’ll have your retirement take home pay.
From there you can easily calculate your retirement tax rates to get your gross retirement income. Remember that most Social Security income is taxed for many people so you’ll need to consider your specific situation.
We’ve managed to keep our fixed costs relatively low, but our discretionary expenses, which includes travel, hobbies and watching live music/entertainment shows, are on the higher side. As of 2 years ago, we were living in a modest-sized paid-off house. The low property tax and utility bills helped to cap our total average annual expenses to about 30% of our pretax gross earned income. As such, our federal income tax was higher than our living costs and discretionary expenses combined.
In 2022, we moved to a bigger and older house, and consequently our fixed costs have risen considerably since then, thanks to the higher property tax, utilities, maintenance costs and frequent repair needs. We also traveled extensively in recent months. This has pushed up our total expenses in the past 12 months to over 75% of our combined gross salaries. Frankly, I was sweating a bit about the sudden jump, but I’m hoping to get it down to about 60% moving forward – a level I can sustain for some time.
Very difficult question to answer because people have such disparate visions of what they’d like their retirement to be like. I’m fortunate to have been able to plan for substantial labor-free income and have a family with modest material ambitions. Together, these should allow me to do “the little things I like to do,” like listening to rock-and-roll oldies, walking hand-in-hand to our favorite coffee shop (and reading the Monday edition of Barron’s on Saturday morning!).
I think my wife and I will be able to wind down our labor-intensive work with patients and still manage a lifestyle suitable to our desire for ample entertainment and travel to renew old friendships. Although our fixed and discretionary expenses are modest relative to our retirement income, I do not have disability insurance and want to be prepared for any health calamity. Ultimately, I want to have enough “left over” to ensure that our son can live as free from want and an alienating career as my parents and grandparents ensured for me.
For me I would need nearly 100%. My expenses might drop some for commuting but with spare time I seem to spend more that offsets it.
My pension plus our SS benefits exceed 100% of my base salary which is what we lived on when working.
Our spending – after taxes- while different is not less and that includes spending on family, including 529 plans, various forms of travel. It also includes charity giving and modest savings.
Some months we spend it all, some not. If not it builds up for unplanned spending like the $3,000 on car repairs i will pay tomorrow.
The cushion we have allows for inflation too.
Is 100% necessary? Probably not, but i would not want cut it too close at less than 80% especially if i didn’t have a pension.
This is a hard one for me to answer as my work income declined in later years as I gradually reduced my hours and workload to effect a “glide” into retirement.
But I can speak to our expense level. I think it’s actually declined a little, thanks to reduced car expense (I had a fairly long commute), clothes and dry cleaning (I wore a suit every day), business lunches, etc. I’m sure that’s not true for many folks as they may have increased spending on travel and, later on, possibly medical and long term care expenses during retirement. But we haven’t traveled a lot and, so far at least, have been pretty healthy.
I calculated that our core expenses took up 30% of my final salary the year I retired (2023). That includes real estate taxes but not federal/state. It also does not include charitable giving. Our household income was not particularly high, by the way. Having a paid off house helps. I think 50% would be fine based on our spending habits. Sorry, Mr. Quinn.
Youza! Since i retired my pension has so far lost 40% of its buying power. Relying on investments may have offset some of that, but on the other hand perhaps not.
I don’t think there’s a number for me. Knock on wood, by the time I retire, I’ll have saved enough to where an external income is not necessary. What will be important is filling my days with meaning–if some cash comes along with that, I’d be fine with that too.
I suppose merely having enough income to match my expenses would provide the psychological benefit of not having to tap my savings.