I've often heard that in retirement, you only need 70% of the income
you had when you were working.
Sometimes I've seen this as 80% or occasionally as high as 100%.
I always wonder where does this great savings come from? It seems
like the only savings you get from not working is that you don't need
to buy work clothes, and you don't need the gas money to and from
work. But that hardly seems like a 30% cut in expenses.
In fact, I'm thinking the percentage should be something more like
110% since when you lose your job you usually have to pay for your own
health care. Especially if you retire early or don't want to rely
solely on Medicare.
Or when they talk about saving money are they assuming you downsize to
a smaller place? Or are they talking about 70% of your gross income
and your taxes go down? I can't see your net expenses going down
much, if at all. And with inflation, they may just keep going up.
I found that the spend rate in retirement is close to 90%.
You don't pay into Social Security (after tax money) nor do you
contribute to retirement funding. You don't have commuting expenses nor
do you have to have expensive lunches.
On the hand you do have health expenses which if you retire from a
company with a great health plan can be shocking. You also have to
occupy your self from 9 to 5 which may be expensive
I suspect the 70% figure is a holdover from the days when seniors
didn?t do much any longer and went quietly to their graves. Nowadays,
it is becoming increasingly common for seniors to continue to pursue
earlier interests and activities after retirement and even to acquire
new interests and activities. I know a few elderly people who wouldn?t
be caught dead babysitting the grandchildren, but instead are hiking
in the Grand Canyon or taking flying lessions. Time marches on.
I worked on a consulting project where we thought a lot about this
topic. It wouldn't surprise me if a typical MIFPer is at a relatively
Two off the top are Social Security/Medicare taxes at 7.65% of earned
income (for most people), and whatever your savings rate is. An
aggressive saver is at something north of 15% of income, a
"lifestyle-matching" saver is probably saving 10% at least. That can put
you below 80% of current income required, to match current lifestyle,
just from those two factors - you no longer pay into SS and no longer
need to save because you've shifted to depletion mode for your
Another one at the top is income taxes. The retiree averages are lower
than worker averages. So it's common to require less income because less
of your budget goes to income taxes. In part this is because the same
amount of income is taxed less - Social Security isn't 100% taxed,
dividends aren't either, and the tax code heavily favors low-middle
incomes at the moment, with respect to credits and brackets (that
oft-cited "half of people don't pay any federal income tax" - recently.
I have seen retirees with medical expenses that plummeted once they went
onto Medicare. The obvious example is someone who pays for their own
health insurance in their early 60s. Very big variation on this though.
Another common one is going from a mortgage payment to just property
taxes, insurance, and upkeep. That reduces the cash-flow requirements of
daily living quite a bit.
Netted out it's going to be something below 80% for most people. But
it's entirely personal -- so a rule of thumb based on income is about as
useful as buying clothing based on average height in the US.
PS these are the online tools I did some work on, that try to address
some of these issues when coming up with the "on-track" retirement
savings rate - you can adjust based on your own assumptions:
When I retired, I had my car insurance policy changed to reflect that,
and my insurance cost decreased by a substantial amount. I am now
driving 5k miles per year vs 15k miles per year previously, so the
savings in gas and maintenance are also substantial.
People tend to exaggerate the importance of the cost of gas. Even when
I was working, the cost of my car insurance was almost as much as my
gas cost. Now that I am retired, the insurance costs me more than the
The gross is unimportant - what counts is the net spendable income. My
gross now is only about 75% of what it was when I was working, but my
net spendable is actually a little higher.
Looking at an old pay stub, I see several deductions from my old gross
pay that have now disappeared: FICA, Medicare, 3 Retirement plans
(which totaled more than my old Federal withholding). Those deductions
were almost 19% of my gross.
The majority of my income now is social security, and at my income
level, I will probably only have to pay income tax on 50% of that, vs.
almost all of my income when I was working.
It would seem according to Warren Buffett and others, low-to-middle
incomes were heavily favored tax-wise in the 1980s and 1990s. They are
not similarly favored today. To recap Buffett's latest on this, see
Also one could easily argue that progressive taxation (imposing lower
tax rates on lower incomes) does not "favor" but instead is equitable.
This is because the folks with lower incomes contribute
proportionately more to production, for each dollar of income, than
the higher incomes. Hence the lower incomes should pay a
proportionately lower tax rate.
I just don't appreciate a possible reading of Tad's statement to mean
that the low and middle classes are getting such a terrific deal from
the IRS code right now. Historically speaking, today they are not.
80 is the more common number, but the true number isn't the same for
everyone. When I look at our budget, about 20% goes to savings, 15% to
the mortgage, so even before discussing social security, we are living
on 65% of our income.
Depending on lifestyle before retirement, one can easily burn through 2X
their pre-retirement spending. With 52 week off compared to the 3-4
weeks we get, some exotic travel can easily do that.
But these are rules of thumb, as they say, your mileage may vary.
If you target the 80% level, you will be on track so a slight delay (a
few years) can get you closer to 90% if you start to look at your budget
and feel it won't suffice. It's a good a starting point as any. (And
yes, I'd need to add a chunk for medical back in, so my number gets
close to that 80% level.)
My wife and I both retired about 5 years ago. She went on to get a
Master's Degree, took a two year course to become a docent for the
Phoenix Art Museum, goes to the Museum or old folks' homes about 3 times
a month to give talks, and has started a small business selling her
knitted scarfs and paintings. Me, not so much. I already have a Ph.D
and just enjoy the time to tinker, read, and travel (both of us).
BTW, our expenses are about 90% of pre-retirement. She has a great
(read very good coverage at a moderate price) state health plan, my
Motorola one stunk for retirees, so I am now her dependent. We eat out
a fair bit and that is a significant expense.
Here's what I was leaving out. I've been figuring out the money I
spend every month AFTER my retirement contributions since those are
For the most part, I don't even think about that money, which is about
25% of my gross income.
But, since I wasn't including that money in my expenses, it doesn't
drop my expenses any, as I've figured them.
If you add that 25% to the payroll taxes, that brings you close to the
You'll gain time to be a do-it-yourselfer or at least a really smart
shopper. You may simply settle into this naturally - at this stage of
life you should no longer be slave to instant gratification and can
research or wait things out more. For every dollar you save, it's like
having income of well more than a dollar since that would have been
taxed. For instance:
Stock up on nonperishable foods, etc primarily on holiday loss-leader
sales - at the checkout they start to announce my % saving and their
jaws drop at my saving amount exceeding my final bill (all without
coupons). Take non-essential flights mainly during extreme sales - I
snagged an overseas intnl promotion for $99 outbound and $1 return on
an airline just starting up. And found I could transfer aging,
deflated air miles from an acquiring airline back to the victim
airline they were swallowing, with amazing choice of intnl trips just
before they vanished.
Break the chains to your work geographic zone. You may be paying extra
cost of living, local taxes, and annoyances such as congestion or
climate in order to be near a good work location. Leave for a place
that suits your interests better (especially free pastimes). I can now
walk to favorite outdoor sporting sites as well as supermarkets. A
university within a long walk has umpteen free cultural events with
the public invited (even free movies).
End of work may mean no need of specialty clothes or poor value meals
out. Addiction to some expensive pastimes may fade when you realize
they were simply cathartic escapism from your work mindset. Retirement
shouldn't a time to soldier on with old expensive habits or filling in
time - you are getting back the freedom of being a kid again, and kids
live large without even gravitating to pricey accessories or half
hearted time fillers.
Congatulations to you and your wife for staying active! The way I look
at it, my wife and I never did ?retire,? because we both had jobs we
enjoyed and are doing many of the same things today we did during our
working years. She said she didn't want retirement but another 100
years or so of work. By the way, we live in Canada, and, although we
often worry about our health as the years go by, we worry not one whit
about paying for health care. Americans, take heed before you reject
On Mon, 29 Aug 2011 12:09:47 CST, bo peep
You are correct about gross being unimportant. For instance, if your
mortgage costs $10,000 a year excluding taxes it is after tax money
and in reality you may have to $13,000 gross to pay that mortgage.
On Mon, 29 Aug 2011 13:40:28 CST, Elle
Elle would you mind explaining what you mean by "folks with lower
incomes contribute proportionately more to production for each dollar
======================================= MODERATOR'S COMMENT:
Please try to steer this back towards financial planning
A better number is assume you be continuing about the same budget as
you currently have. Maybe you spend less on work commute and work
outfits. Maybe you'll spend more on lost benefits like dental. And on
hobbies and travel.
Assuming the goal of societies is to increase wealth production
(resulting in greater civilization and presumably a better quality of
-- As a person's personal income RISES, then
-- His/her inclination either to pay competitively for goods and
services or to invest competitively in XYZ, FALLS.
-- The incentive for the producers of goods and services (or
investment XYZ) to produce more goods and services (or more of
investment XYZ); more efficiently; with increasing improvements; and
so on, FALLS.
-- Wealth production FALLS.
This means there is a fraction of the income of wealthy folks that may
be taxed without affecting wealth production.
Granted there is no perfect system of progressive taxation. But the
above is one of the larger reasons why progressive taxation is
generally used worldwide. The concept was not pulled out of the blue
just to, say, (seemingly) screw over the wealthy. Generally speaking,
a system of progressive taxation tends to stimulate economic growth.
Moderator David: I hear you.
The OLD ASSUMPTIONS included:
1 - no mortgage in retirement - again, the OLD RULES recommended no more
than 28% of your income for a mortgage payment;
2 - no contributions to a retirement plan - usually around 15% or so;
3 - no FICA taxes - 7.65% or so;
So if we subtract 28% for your mortgage, 15% for retirement contributions
and 7.65 for FICA your post retirement expenses should be reduced by about
50%. The drop by 30% was intended to leave you some INCREASED monies for
fun things. IN A PERFECT WORLD AS A STARTING POINT.
Like all planning you have to start somewhere. In today's world where
retirees still have mortgage payments, other debt, are helping their adult
kids and everything else, I generally start with needing in retirement about
what you had when you were working. NOTE I SAID START WITH - every case is
different and each case needs personalized tweaking.
Gene E. Utterback, EA, RFC, ABA