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researching how much my DH and I will need in our retirement. Several articles state 80% of what your previous income was. I'm surprised that it is that high. Of course, everyone's situation is different and things come up - man, do we know things come up. In your opinion, unless you plan to travel or have expensive hobbies, etc. is 80% high? Thanks.
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This may not be the answer you're looking for, but: As you yourself said, everyone's situation is different. Trying to come up with a % of your previous income needed during retirement that's "generally appropriate", is like trying to come up with a single figure for how much in taxes we all pay. It can't be done.

The only useful way to determine the number is on an individual basis. And you have to start by knowing, as detailed as possible, what your yearly expenses are. Using Quicken, we entered every check we wrote and every credit card charge we made for the past several years. Did that take a long time? Of course it did! And you needn't be that exact, but the more data you have, the better your answer is going to be. We broke down our spending into categories (of course), and the categories were broken down into "discretionary" and "non-discretionary". Some people break things down into 3 categories: "required", "nice to have", & "luxury". Whatever works for you.

Once you know how much your expenses are (including all estimated federal, state, & local taxes), then you can easily determine the % of your previous income that is. Frankly, we never did that last calculation, as we didn't find it meaningful. The only important calculation for us was, how much do we need to make each year?

There's a huge back log of messages on this subject in the "Retire Early Home Page" board. If you haven't been there yet, you should definitely check it out. Not easy to do, since there's about 65,000 messages, and the search capability only goes back a few months. But worth a try:

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The simple answer is that you will need about 80% the expenses you will have just before you retire. You should subtract your mortgage payments, the cost of your kids education, etc. that you have now.

The Retire Early Home Page board does have good information along these lines. Use the Threaded (Collapse All) feature. But you will still have a whole lot of subjects to look through.
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The others are correct in saying that:
1. It's a very individual thing,
2. You need to keep track of expenses to have good idea of what you are living on, and
3. The REHP board has a wealth of info, and too many messages to read unless you're already retired and have high speed cable modem and speed reading capability.

So I'm going to try to give you a couple of suggestions that may give you a way to shortcut some of this to at least get a ballpark answer to your question for the time being, until you have time to get into more detail.

First, do go to the REHP board. Start by reading the FAQ which has most of the really important stuff either written there, or at least with links to some of the more significant posts.

Getting through 65,000+ posts is like tackling War and Peace in the original Russian. What you might try is going back to message #1 and just reading messages that have a lot of recs. I still hang out there but the last year has seen a lot of off-topic (OT) posts, which while having some bearing on retirement, don't really help you out in figuring out a plan.

Secondly, the short answer to your question is that (unless you haven't been saving anything) 80% of your pre-retirement income may be too high. Until you have the time to actually keep detailed track of expenditures, you can probably roughly approximate your expenditures by doing something like the following (don't pay attention to the actual numbers or percentages, they're for illustration).

Fortunately you've just finished your taxes from 2001, so you have the most important document right at hand (and probably have the other backup you need in your tax backup info folder) right?!

Let's take last years gross income (let's assume numbers) $60,000
less total income tax due.........................say.....(11,000)
less total Social Security and medicare taxes paid..say...( 4,800)
less any state income taxes paid, if any..................( xxx)

following line is important....let's say you're diligent
LBYM people, which is how you've saved something to retire
on. Say you been saving, last year.............say.......( 6,000)
(For the savings number you need to check all the places you
might have saved: 401k [your portion only, not employers
matching part]; stocks or mutual funds; money market; cd's;
IRA's of all types; increase in your checking or savings;

we'll assume here that you haven't significantly increased your
credit card debt during this year. If you did, we'll need to
consider that in the next step.

OK, let's add up. Total gross income less the sum of (fed income taxes, ss taxes, state income taxes, and total savings). What's left is what you lived on last year (roughly). If you earned it, and didn't either pay it in taxes or save it, you spent it. (If your credit card debt went up significantly from previous year, add this to the total from this step, you spent that much more.

Now you've got some idea of what you spent last year. Any plans to make significant changes to those expenditures in retirement? Only you know whether to add or subtract from this base number because, for example, you only owe 3 more years on the mortgage, or this was the last year of tuition for your youngest son, or you want to travel a lot more, or you now need to allow for privately purchased medical insurance.

If we assume, just for the sake of argument, that your expenses will be approximately the same for next year (and assuming that's the first year of retirement) then the major changes to the equation are that you will probably stop saving and you will probably stop paying ss taxes. So you can take your newly calculated yearly living expenses, gross up to approximate federal and state taxes, and that is the total you need to equal the same living standard as last year while working.

There are only about a zillion misc factors that you'll need to work out as you develop your real retirement plan because they're different for you than this over simplified model. Like is you retirement income coming entirely from IRA's (as assumed above) or does it include liquidating stocks held a long time so that they get taxed at lower long term cap gains rates? Do you expect to start drawing SS and when? But this might have given you a real quick and dirty way of making a first pass at the number (or it may have confused you completely, in which case i apologize).

Ok, off with you to the REHP board and start on the FAQ.

Good luck.


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Author: bgmd Date: 4/13/02 6:18 PM Number: 7887
researching how much my DH and I will need in our retirement. Several articles state 80% of what your previous income was. I'm surprised that it is that high. Of course, everyone's situation is different and things come up - man, do we know things come up. In your opinion, unless you plan to travel or have expensive hobbies, etc. is 80% high?

This is one of the more difficult questions that always needs to be answered before deciding to retire. As others have said, it is a very individual thing, and there is no simple formula. However, there are a few key things to remember when doing the research.

1) How much are you saving from your current paycheck? That will obviously go away when you retire. This is often the largest reduction in income needs after retirement.

2) How much are you paying in social security and medicare taxes? Those also go away when you retire.

3) How many miles are you driving? Most people find a significant decrease in these costs.

4) What about dress clothes worn for work? This expense often decreases significantly, especially if you wore a suit to work.

5) Will you eat out for lunch every day? This expense often goes away.

Lastly, check into your income tax bracket. Most retirees find that with their reduced income, they are in a much lower marginal tax bracket. This can dramatically reduce income taxes. In my case, I am spending about 60% of what I did before retirement, but my income is so much less that my income taxes went from 39% to 7%, and that is 7% of a much reduced income.

So, I think that 80% of previous income is usually much more than the average retiree will need. However, 80% of previous EXPENSES is not unreasonable.

Of course none of this discusses NEW expenses you will have in your retirement lifestyle, but it should help you get started.

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I have scanned the previous responses and really must agree with the comments that how much you will need depends. I would recommend you get a version of Quicken or Money that includes the retirement planning function. That way you can say we will eat out more, won't pay this or that.

Do not under estimate medical costs. The majority of people over 65 find medicare alone inadequate. You are probably aware that perscriptions are not covered. Even if you get insurance (figure $200 to $500 per month for you and HD) it probably won't cover unlimited perscriptions and you should expect some copayments. It is not hard to have a couple of medical conditions that want daily pills at $1 to $2.00 per pill.

Taxes are another issue. 401K money is going to subject to income tax. You will have a monthy deduction for medicare (not the isurance I mentioned above).

Personally I have done things like house maintance, yard work, etc. We rarely ate out. Bottom line 80% would be low for us. If I develop health or laziness issues and choose to stop mowing lawns, fixing roofs, repairing dishwasher,etc. we could easy see our retirement needs exceed 100% of pre-reitrement costs. While working we had excellent medical and dental insurance paid by an employer. These costs plus a little travel soon equal the cost of clothing and other work items with our life styles.
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Do consider that the first few years of your retirement may be more active than in the later years of your retirement. You may want to travel, spend more time boating, skiing, golfing, indulging in hobbies, eating out, spoiling grandkids, taking classes,attending concerts, cruising the world. You may decide to move to a warmer climate or buy new cars. As a result your expenses in the first few years of retirement may be greater than anticipated.
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