Post-FIRE income requirements

[Al1961]

Until about age 51, I was not really interested in early retirement, at least as it is sought after by many on this board. Early retirement meant age 60 and retiring on a defined benefit pension. Then I ran into some health issues, made worse by the stresses of my profession, so things had to change, and I started to look into the matter more closely. I did end up retiring just after my 53rd birthday.

So we all know that expenses are what is important in determining what you need for retirement income. Even so, I still see lots of articles and websites that focus on income replacement ratios of 60%-80% of pre-retirement income.

In the years leading up to retirement I spent some time tracking expenses - with the goal of determining what expenses we could avoid in retirement, hence what income we would need. I thought it might be useful to present that information and ask others to share their experiences with income and expense changes when transitioning to retirement.

Expenses avoided (as % of gross pre-retirement income)
Income and payroll taxes - 20.9%
Savings - 23.7% (RPP, RRSP, TFSA, Taxable)
Mortgage - 20% (we had a pretty aggressive debt reduction schedule)
Employment expenses - 4.1%
This accounted for 70.2% of gross salary in cash flow not required during retirement.

Income in retirement is comprised of: (as % or pre-retirement income)
DW's pension - 22.5% (with COLA based on CPI)
Withdrawals from Stash - 11.7%
This amounts to 34.2% of gross pre-retirement salaries

Net Disposable Income increased by 23.7%.

We'll spend this budgeted difference on travel, hobbies we now have time for, and home improvements - without sacrificing our standard of living.

When CPP/OAS kick in, we'll be at 166% of pre-retirement disposable income (in real terms) on only 44.2% of pre-retirement income. RMD's will eventually make our required withdrawals ridiculously large. We don't expect to spend nearly that much, but who knows what will happen if/when dementia sets in. Maybe I should buy a boat!

So while we were far from the most frugal on this board, our experience shows the power of expense reduction on retirement income needs.

If you don't mind sharing, what was your experience?

[Stasher]

You have shown a good example to prove that expenses are often over inflated by the investment industry on what you should have in retirement. Well done and best wishes on your retirement

[respond2u]

I wish this forum had a "like" button! Great analysis!

In the US, the only post-FIRE "gotcha" is the loss in ACA subsidies from increased income. It amounts to a 25-30% marginal tax for me, making it unwise to take more money out of my retirement account (or do roth conversions).

Well, that and having time and energy for more vacations : )

[Al1961]

I wish this forum had a "like" button! Great analysis!

In the US, the only post-FIRE "gotcha" is the loss in ACA subsidies from increased income. It amounts to a 25-30% marginal tax for me, making it unwise to take more money out of my retirement account (or do roth conversions).

Well, that and having time and energy for more vacations : )

Thanks!

It's nice to not have to deal with the health insurance issues that you folks have to in the US. DW still pays into the federal government medical and dental plans, but that is only like $140/mo for eye care (various limits), prescription drug and dental coverage (80% reimbursement). This saves us thousands each year.

[respond2u]

...
It's nice to not have to deal with the health insurance issues that you folks have to in the US. DW still pays into the federal government medical and dental plans, but that is only like $140/mo for eye care (various limits), prescription drug and dental coverage (80% reimbursement). This saves us thousands each year.

Yeah, but ....

but....

I got nothing.

Wait, yeah but...

Nope, still nothing.

[Al1961]

...
It's nice to not have to deal with the health insurance issues that you folks have to in the US. DW still pays into the federal government medical and dental plans, but that is only like $140/mo for eye care (various limits), prescription drug and dental coverage (80% reimbursement). This saves us thousands each year.

Yeah, but ....

but....

I got nothing.

Wait, yeah but...

Nope, still nothing.

LOL

Sorry for making you feel bad, eh. Maybe I can help you out here:

"But...

but ... you had to work decades longer!!!!!!!!"

[respond2u]

LOL

Sorry for making you feel bad, eh. Maybe I can help you out here:

"But...

but ... you had to work decades longer!!!!!!!!"

Ha! Not true--It's helped me to retire early!

Health insurance is insanely expensive if you make more than $60K, but it's nicely subsidized now that I've retired and expect to make less than half that. There's a real disincentive to earn more, though...

[Greystache]

Great analysis. Our situation was similar to yours. When DW an I retired, our gross income was $210K/yr. Our spending was $72K/yr. In retirement, our spending is $60K/yr.  I cringe every time I see some "expert" say you need 80% of your pre-retirement income to retire.

[zinethstache]

I am recently FIREd, but calculate including our high ACA costs we will still only need to spend 2 to 3k/mo (variable depending on traveling activity). 

I spent alot of time with my parents and the in-laws this last year (we lived in my mom's pasture). We scaled down everything for FIRE with full time travel. I was very nosy and asked them specific spending and income questions. It was all part of verification of my plans, and I suppose checking on their fiscal health as well. It seems for our region if you own your home (so you just pay property taxes, HOAs and utilities), 3.5k is plenty to live on as that is what both families of 2 reported. Their spend is higher these days because of SS which now all 4 have activated, and my FIL has a sizable 401k which now has RMDs he has to spend. It is funny to watch these once frugal people go nuts spending with all the extra cash. I think each of the pairs net in the neighborhood of 60k between pensions, SS and 401k RMDs. They sure did hit the sweet spot:)

We spent about 50k a year the last couple of years, and will spend 30k or so this year first FIRE year. I have to remember that the first two months of the year were prep months so we had to buy provisions for travel. I hope to have some very light spending months to offset those expenditures. It is strange to see my new MINT budget and how little money moves around in our accounts. Very exciting stuff!

[gerardc]

Great analysis. Our situation was similar to yours. When DW an I retired, our gross income was $210K/yr. Our spending was $72K/yr. In retirement, our spending is $60K/yr.  I cringe every time I see some "expert" say you need 80% of your pre-retirement income to retire.

That 80% is assuming you were spending almost all of your pre-retirement income, less 10-20% for savings as regular people do. Of course if you spend 10%, you won't need 80% once retired, that's just basic logic. They should really talk about % of expenses, not of income.

[respond2u]

Great analysis. Our situation was similar to yours. When DW an I retired, our gross income was $210K/yr. Our spending was $72K/yr. In retirement, our spending is $60K/yr.  I cringe every time I see some "expert" say you need 80% of your pre-retirement income to retire.

That 80% is assuming you were spending almost all of your pre-retirement income, less 10-20% for savings as regular people do. Of course if you spend 10%, you won't need 80% once retired, that's just basic logic. They should really talk about % of expenses, not of income.

That's an interesting twist on it. If a financial planner used that justification, I'd wonder what s/he were on. Certainly wouldn't trust them ...

[frugalfinancehippy]

Yes when you look at what you're actually spending without including your savings it sure gives you a more achievable number for FI than when calculating to replace. Early your whole salary.

I'm still planning to have a buffer that we will add to savings in retirement if we don't need it but since we're renting in a HCOL area and we don't have a plan nailed down I'm just trying to keep our options open.

[Frugal-Investor]

One other factor in post-FIRE income that was important to our decision to retire early was our ability to dial up or down spend for the year.

Partner and I thought we had a stash that was plenty big, but I wanted to do a deeper dive on potential budgets. Prior to our 50s, we didn't use budgets in the normal sense of the word. Rather, at career start we saved 20% of income, then ramped that each year with raises and tucked away bonuses, eventually getting to > 50% savings. The remaining (ring-fenced) income was divvied up with modest planning work and long-term orientation. So, when we were close to retirement, we went into detailed household budget work as newbies.

We did a trial year of budgeting at a low level (cutting most discretionary spend) to prove we could dial down, spending at around 30% of pre-tax income and at a level equivalent to a 2.5% withdrawal rate. And we knew we could have gone lower with virtually no pain. And, by doing a deep dive into spending, we saw options that got us to a lower cost basis. The sense of control made retirement feel way less risky than it would have otherwise. Our retirement years have had spending closer to 3.2 % to 3.6%.

[evanc]

[quote author=Al1961 link=topic=70865.msg1498343#msg1498343 date=1491074356.

So we all know that expenses are what is important in determining what you need for retirement income. Even so, I still see lots of articles and websites that focus on income replacement ratios of 60%-80% of pre-retirement income.
[/quote]

 This seems to be a generic assumption that your current spending will continue in retirement, with a further assumption that your housing will either be paid for or significantly reduced ( most people spend 20 to 40% on housing). YMMV

[albireo13]

In our case we just landed a fresh 30-yr mortgage last year.
I plan to retire in 2 yr so, we are budgeting for the payment.    Our plan is to sell and move again in 10yrs .... small cottage, cheaper, or condo.
Not too concerned over it really.  Half of the payment is RE tax escrow so, I would only reduce payment by half if I paid off the mortgage anyway.

Monthly expenses which will go away in retirement:
* savings   (big)
* payments on college loans, CC debt, etc .... these will be cleared off before retirement
* greatly reduce transportation ... tolls, gas, etc  - commuting 2hrs/day to work goes away

[Al1961]

In our case we just landed a fresh 30-yr mortgage last year.
I plan to retire in 2 yr so, we are budgeting for the payment.    Our plan is to sell and move again in 10yrs .... small cottage, cheaper, or condo.
Not too concerned over it really.  Half of the payment is RE tax escrow so, I would only reduce payment by half if I paid off the mortgage anyway.

Monthly expenses which will go away in retirement:
* savings   (big)
* payments on college loans, CC debt, etc .... these will be cleared off before retirement
* greatly reduce transportation ... tolls, gas, etc  - commuting 2hrs/day to work goes away

I mentioned earlier in this tread that we had an aggressive mortgage payment plan - it was $575 per week on a fairly short amortization period, and we also made $1500/mo in lump sum payments. I did not want to carry a mortgage into retirement. We did anyway, but dropped the lump sum payments.

The foolishness of upgrading your home a few years before retirement, I guess. The place will be sold in a couple of months. We are moving to a less hostile climate! It snowed the last four days here in our sub-arctic hell hole.

Son has one more year of university left (BSc. chemistry/physics). We are cash flowing that. Like Daughter, he'll finish his degree without student loan debt. He's talking about another degree, either law or engineering. We'll have some ongoing support costs, but eventually will free up cash for longer winter holidays. Because of the pets, we won't be taking those long Costa Rican/Spanish/Portuguese winter vacations for several years anyway.

[FIRE Artist]

I am aiming to have my current net pay after tax and pension etc, to be my retirement gross income (about 55% salary gross today).  I will still be paying on my mortgage when I retire so don't want to start out with much less cash flow.  Once the mortgage is gone, and I eventually start getting CPP and OAS, I run the risk of being insanely rich, but I am ok with that I guess.