I’m trying to wrap my brain around this one. Why is the generic recommendation to expect to need 80% of your income when you retire?
I currently invest 30% of my income, so right off the bat I’m living off of 70%.
Additionally another 13% goes toward my half of the mortgage, which I won’t have when I retire. So effectively I’m currently living off of 57% of my income.
Granted, I know those rule of thumb calculations don’t know MY personal situation, which is why I’m asking what kind of assumptions that are using.
That recommendation seems rather useless, except maybe as a spur to get people thinking about financing their retirement. Your expenses in retirement have only a vague relationship to your current income. Your lifestyle may be very different in retirement than it is now. As you note, you may not need to add to your savings in retirement. Your health care costs may be very different, depending on Medicare, who pays for your insurance now, etc. Your income taxes may be quite different, especially if your retirement income comes from capital gains on stocks you sell. You may (or may not) be trying to leave an inheritance.
I think a lot of it comes from the fact that some major expenses drop after you retire, like commuting and retirement-plan contributions, but like Ike said, it will depend on your personal situation. Plus, many retirees spend more the first 5 or so years, but then spending drops off and then goes back up in later life. For planning purposes, I look at my net income for the year instead of 80% of annual gross.
Texas Tech University professor Michael Finke analyzed the 80% rule and published his conclusions in Research, a magazine for financial services industry professionals. Finke noted four factors that the 80% rule does not recognize. One, retirees no longer need to direct part of their incomes into retirement accounts. Two, they no longer involuntarily contribute to Social Security and Medicare, as they did while working. Three, most retirees do not have a daily commute, nor the daily expenses that accompany it. Four, people often retire into a lower income tax bracket.1
Given all these factors, Finke concluded that the typical retiree could probably sustain their lifestyle with no more than 77% of an end salary, or 60% of his or her average annual lifetime income.1
You don’t. Based on our expenses we need about 60% of pre-retirement income (gross income) to sustain the current lifestyle. That 60% gross considers no SS outlays, no retirement savings outlays, income taxes, etc. In other words, 60% gross leads to a net income that supports our current non-savings lifestyle. But I (and you) are atypical. Not many people by percent of population are saving such high percentages of their income. Rather, most are living off a higher percentage of their gross.
I’ve been retired for nearly 5 years - apart from 18 months during covid, I’m spending more than I did when I was working - which is a bit worrying. I’ve done a lot of travelling and house upkeep and maintenance costs keep cropping up. I’m not sure why you would think you spend less during retirement - I’m no less active and have more time to do stuff - which costs money.
Probably need some reserves built up for the near end of life expenses ie nursing home, non medicare covered medical expenses . Also inflation expectations, worse case, might need to be built in unless you have well to do kids. I’ve had 2 not close friends move to Mexico based on expected cost of living issues. Nit sure how they feel now.
Well its simply a rule to help you plan. It has many flaws… How far are you from retiring, your income will go up before than so 80% of now or then. You might be paying off a mortgage now, but as you near retirement you might not, so you spend on more luxury things.
I think it was an old rule that helped when people lacked the information that is available now.
The other thing that is maddening. Financial tools, almost all look at spending during retirement as a fixed level, but then every financial person will talk about the 3 phases, the go-go years, the slow go years and the no go years. My parents were perfect examples, soon after retiring traveled around bought an rv, go-go. Then sold rv bought a condo, wintered in Florida, slow go years, now mom lives in a condo here in Michigan, the no go years.
Of course from a financial side, if your trying to make the $$ last this is backward as your spending most when you have most time to grow it, but life doesn’t work backward, so it is what it is.
As you near retirement, you will start to get a sense of what you think your monthly spend will be. Then you will retire and find out you were completely wrong. LOL
Back to original question, in the old days, you bought a lunch at work, you had work clothes, and all those things stopped. So you were spending less. I think this rule worked better in the 60’s and 70’s when retirement was more a kick back and relax and where now for some its a time to live life and explore.
You do need to save in retirement because you may live to be 90+ so you need to reinvest some of you earning each year. It sounds like you have been saving a good amount. Do not be surprised by how much income you will have when you are forced to drawdown you 401K plans. You may want to transfer some if it to Roth IRA when you income drops so you won’t have a huge tax burden later.