Opinion?-80% of salary for retirement.

80% is fairly close. 77% is parity if you discount the 15% you should be saving for retirement and the 7.65% tax you pay for social security.

If a person has significant additional job expenses like commuting and work clothes, they would cut the number. But you might increase hobby and travel in early retirment. Plus medicare may not pay as well as the average employer health insurance plan.

25% to 50% of your income, pensions if any, etc. Thus the average wage earner need to replace about 40% of income.

I think that, like many bell curves of life, the 80% is a 'target', a 'rule of thumb' and little else. A story in Barron's a few weeks back, prompted me to post this very question. Of course there are some expenses that will drop, clothing and car expenses come to mind. The other biggies are the mortgage payment which should end (for most people) by retirement time, saving for retirement, and saving for college. I remarked that between those last three, plus the nanny, I was actually living on less than half our income a few years back.

Other expenses will possibly rise. One can look to catch up on travel, see all those places listed in "100 places to visit before you die." Healthcare expenses can quickly rise as well. Maybe the restaurant bill goes up, too. Some hobbies can get pretty expensive.

The more important lesson is that without some kind of goal, there's no way to track your progress. Every so often, one should track their expenses, right to the dollar for at least 3 months. This will help identify large sources of 'latte factor' items that one can eliminate or reduce to cut expenses (and this answers Paul M Brown's concern that this lesson isn't taught enough) and to at least start to get a grip on the total annual expenses with an eye toward retirement. JOE

I don't look at it in terms of percentage of my current income. I look at it in terms of what my expenses will be to maintain the standard of living I want.

Personally, I'm anticipating that my living expenses are actually going to go *up* significantly in retirement. #1 reason: health care costs and having to buy health insurance out of my own pocket instead of having an employer-paid plan. I may also want to travel more and/or relocate to an area where I'd need/want to buy a car to get around for recreational activities. (As a city-dweller, I get around by foot now.)

My one current "expense" I'm paying out of my current income that I won't have in retirement is.... saving for retirement. :-)

-Sandra the cynic

I like that 80% because if I take away my work expense which is about

15%, I'd have (would have today) about the same take home pay ... indexed ... but then, it depends ... reality,eh. In my case, if my wife were to retire today too, and without a pension, we'd be getting by on that one income versus the current two.

Personally, I like the idea of continuing on from this point with the same disposable income as I have to day ... I would consider anyone that achieves that a very successful person. Or, my rule of thimb since my first real job ... never accept less.

If you're saving 20% (say, 10-15% in 401k + 5-10% outside of it),

80% of your pre-retirement income is *greater* than your current spendable amount of income - (ie. no SS taxes anymore, no more commute, etc.). The biggest factor is the likely increase in your spending on health-care costs (ie. if you had employer provided insurance).

For those who save even greater percentages, they need to replace even less of their incomes - since they were living on less of them to begin with.

You have to adjust everything for inflation. That's why a simple fixed annuity might work for a couple of years, but not for fully funding a long-term retirement. An inflation-adjusted annuity may pay out a hell of a lot less up front, but if you happen to live 30 years on it, it'll make a huge difference later.

I think it's a reasonable ultra-simple rule of thumb. If you don't want to take the time to think through the real issues, it's better to at least make that assumption than to not make any at all.

Do they? Do you plan to? That's where it becomes personal and tricky. If you retire at, say, 55 or 60, you are likely to be young and healthy enough that you'll want to do *more* not less - and suddenly you'll have the time for it that you didn't when you were working.

I don't know about you, but I'm planning on spending about the same when I retire as I spend now. Less on some things and more on others. But my drop-dead minimum is to have saved enough not to replace my current *income* but, rather, my current *spendable* income - which, given that I save more than 20%, means that I need to replace less than 80% of my current income. Frankly, I'd like to have *more* to spend in retirement than I spend now - I don't have the time to do the things I'd like to do - some of which require spending more money than I do now in my everyday life (ie. travel).

I think it depends on how far from retirement you are now. If you're in your

20s or 30s, retirement is a very long-term goal, and life will bring it's changes. You need to have only a very general idea of what you'll need, and 80% is as good a number as any other.

If you've been doing a good job, by your 40s and early 50s you've already built up a reserve and have some general knowledge about it's annual growth and where it might take you. Although you can't yet have anywhere near of firm idea of how much you'll need, it is at this time you need to begin looking more specifically at your wants and needs at retirement.

By your mid- to late-50s you need to start putting a retirement budget in black and white. Have you save enough to live how you want? Will you need to work a few years more or will you be able to retire earlier than you expected? It's at this point when you'll know whether 80% is right, or 90% or 65%.

Elizabeth Richardson

That's what he said.

Retirement can be divided into three stages. The first stage, active retirement, lasts until perhaps age 75, and is the most expensive because people take expensive vacations or pursue expensive hobbies. After age 75, most retirees begin slowing down and living costs decline slowly. By about age 85 to 90, most retirees have reached a relatively inactive state where living expenses level off. I've observed this in my mother, aged 93. Although she has plenty of money, she just doesn't see that much to spend it on. She and my father travelled extensively in their sixties and early seventies, but now going to Walmart or Dillards is a big trip for her.

Speaking for myself now, the 80% rule is a big overestimate. When I was working, my disposable income was about 45% of my taxable income:

10% was going into my 401(k) 10% was going into non-qualified investments 7% was going into Social Security 12% was going into my mortgage 16% was going into income taxes.

When I retired, I stopped paying into the 401(k), investments, SS, and mortgage (I paid it off). Keeping my disposable income approximately constant cut my income tax by another 10%. So my taxable income early in retirement is about 55% of my pre-retirement income. Even so, we still have nice vacations and enjoy life. Social Security amounts to about 1/3 of our income needs, and distributions from our IRAs easily provide the other 2/3 using the 4% distribution rule. We have no money concerns.

Dave

In support of Dave's observations, the Department of Labor did a study a few years back (2005?) that estimated that people over age 75 spend

25% less than those aged 65 to 74. Those over age 85 spend even less.

I have actually heard of planners that start with the 80% rule, but do not adjust it up for inflation. This creates a simplified method for clients to taper-off their spending power in correlation to their budget as they age.

I personally prefer to err on the side of caution. Afterall, major healthcare costs are a huge threat to retirement dollars. If a client estimates they will need 70% pa then I plan for 70% pa to be there well after their life expectancy, WITH inflation adjustments. There are no do-overs in this game!

I do make one concession. The US bureau of Labor Statistics states that over the last 20 years, the CPI for those over age 65 is 1% higher than the overall CPI (around 4.1% for seniors), mainly due to heathcare costs. I use the typical 3% inflation adjuster however.

Keep in mind, all these calculations and "rules of thumb" are just methods for setting goals. You may reach your goal, you may not. You may even decide that your goal was overly ambitious and you are glad you didn't accomplish it. I would hate to see someone live an unfulfilling 65 years just to spend the last 20 "having accomplished their goal."

You have to find a balance that makes the journey as satisfying as the destination.

kastnna wrote on [Mon, 7 May 2007 08:48:04 -0500]:

How does that measure against what the same people spent at 65 compared to at 75, not accounting for inflation.

See above

I agree with Elizabeth. 80% is a good target number 30 years out. For more reasons than are listed. If a person makes 100k at age 25,

80% of this is 80k of income- a good goal. If by 35 this person has received raises to 160k of income, the 80k goal is now 50% of base income. In some cases saving is based on a % of income (such as 401k), but in other cases it is a fixed amount (4k IRA max regardless of income level).

So the longer out one is planning, the higher the % goal should be. I agree with the other posters as well which suggests the reality is many people can live off LESS than 80% of their pre-retirement income.

Set the 80% goal early in planning to come up with a target. As you get closer to retirement modify the target as needed to sustain desired spending.

If we are to take a guess at inflation (today 3% is as good a number as I can come up with), 40 years or so (a working career from 20-62 or there about) will see a salary go up 3.5X not accounting for promotions or other jumps in pay scales. So the way I'd spreadsheet this would be to calculate a % based on final income, i.e. the 80% Elizabeth and I agreed with as a target was not 80% of a starting salary, but a forecast final year salary.

$40K today at age 20, inflates to $138K at 62, and requires $2.76M 43 years hence to replace 80%. (Of course that gets reduced by Social Security, Pension, if any, etc., as others have posted. But to think the target is $32K annual that far down the road would put the OP on a bad path. 15% as a combination of deposits and company match, and an 8% return combine to achieve this ($2.76M) number. JOE

OTOH, if one is using 80% to judge how close one is *now* to one's goal, one only needs to look at how much has already been saved and compare: Suppose you are using that $40k example. If one were to want to retire today, one would need, say, 25 x 0.80 * 40 = $800,000 saved

*today*. If one has already saved only $400,000, well, then, he's halfway "there".

Next year, suppose he's making $41k. Now, his "target" is 25 x 0.80 * $41k == $820k. If his savings is greater than $410k at this point - say he saved $10k (between his out of pocket savings, plus, say, employer match) and his investments went up by 7.5% - he's now got $440k saved and he's 53+% of the way "there" - and clearly making some progress.

Remember - this is all very rough "rule of thumb" stuff, the targets are just estimates - very very rough ones.

Trying to project inflation 43 years out, while maybe interesting theoretically, is going to be very hard to wrap one's head around in the here and now. "How close am I *now*?" seems a little easier to think about.

Whatever works. I'd think one can start with a percent of income saved and inflate neither income, nor the savings, just project a 'real' number. Of course, we are looking at both extremes, if the $40K person had $400K saved, well, they are likely within a decade of retiring, depending on the next decade's return and their saving rate. Coincidentally, I am in that boat right now, having exactly half my "number". With about 8 years to go, I've accounted for the 3% inflation, which doesn't amount to too much, 27% is a far cry from 250%. Either way, I think we agree, the target and needs move a bit (in the very long term). The closer one is to the endgame, the more clear all the numbers become. JOE

I agree with Joe its easier to gauge progress in "annual incomes" saved and automatically fold in the the inflation and raise numbers rather than work with absolute monetary values. You could say you need to replace 50% of income after retirement and save ten annual incomes to generate that at 5%, etc.

Justin,

Sorry for the delayed response. I've been out of town since I posted.

I'm not sure I understand what you are asking (or maybe I just did a poor job of explaining the first time!) I understood the report to mean that as retirees age they spend less.

kastnna wrote on [Wed, 9 May 2007 21:22:38 -0500]:

Are the spending less total dollars or less when inflation is taken into account?

Google is your friend. You'll find your question answered in "UNDERSTANDING EXPENDITURE PATTERNS IN RETIREMENT" at

which I found by googling "retiree spending".

Dave

Less in inflation adjusted terms. For example, assume a 65 yo spends $50k pa. With 3% annual inflation he would be spending $67,200 at age

75 if spending remained constant.

However, it has been observed that actual spending is still close to $50k at age 75, which is 25% less once inflation adjustment is taken into account. It also implies that distribution planning could have been done without regard for inflation. Like I said above, that's a little too risky a scheme for me, personally.