Author Topic: Can't figure out the "70% rule" or retirement budgeting generally  (Read 2010 times)

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Looking at retiring in about 2.5-3 years after having become more frugal since our child left home a few years ago.

I'm new to this board, but formerly active on another FIRE board where it's common for people to look down on anyone who isn't planning on spending 100k/year in retirement.

Few people would call me thrifty, and I do have some bad habits, but I can't figure out how I could need 100k/year once I pay off what I'll call "legacy debt" - namely, things like student loans and mortgage debt. That's where I don't understand the 70% rule - I have no intention of getting new student loans or a new mortgage, and, indeed, my retirement is conditioned on paying those off.

Once I've paid that "legacy debt" I can't see how my bills will be more than 1700-1800/month.  As we've tracked cash expenses (food, gas, vaca, etc) we know those are 1700-2100/month, for a range of 3400-3900/month AND THAT'S the old spendyTube lifestyle.

Throw in no required work lunches, no commute, no work clothes, and that's gotta save at least 2000/year.

I know a big one is health care, but DW and I each have vested health care with no premium and OOP max of like $200/year.

So, is there something about retirement that makes money fly out the door?  Am I wrong to think it will be like my working years but without work expenses?  Appreciate any insights.



maizefolk

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #1 on: April 01, 2020, 01:16:40 PM »
I have a guess about the other forum you may have been a part of. Welcome.

But can you tell me, what is the 70% rule?

In about eight years here and ERE I haven't come across the term.

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #2 on: April 01, 2020, 01:41:43 PM »
"You need at least 70% of your final salary to have a safe retirement" - the favorite of financial advisors and small newspapers that run ads as news stories.

maizefolk

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #3 on: April 01, 2020, 01:47:41 PM »
Gotcha.

No there isn't anything about retirement that makes money fly out the door. They're making the simplifying assumption that a person who earns X dollars a year probably also spends about X dollars per year and then all those savings you describe from not having to get up and go to the office every day (plus a savings rate of maybe 5-10%) account for the decline of spending needed in retirement.

In reality, the larger the proportion of your income you can save each year while working, the less income you need in retirement because if you are able to save more money each year it implies you're also able to live a happy life with less total money per year.

That's a big part of what makes the table that predicts years  to retirement just from a person's savings rate from "Shockingly Simply Math Behind Early Retirement" post work.

blue_green_sparks

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #4 on: April 01, 2020, 02:20:23 PM »
For us it worked out to be "The 20% Rule". Most people immediately spend just about every penny they make and for them the 70% rule might make sense.

reeshau

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #5 on: April 01, 2020, 05:15:48 PM »
"You need at least 70% of your final salary to have a safe retirement" - the favorite of financial advisors and small newspapers that run ads as news stories.

This is not a FIRE concept at all, but "traditional"  The general breakdown is as follows:

Assume you spend everything you take home.  (i.e. no savings outside company retirement plans)

Then...

You save 10% because you are no longer saving for retirement
You save 7.65% because you don't pay FICA on your 401k withdrawals
You may go down a bracket for federal income tax. (Bonus if you Roth'ed it, and pay only on employer contributions)
You have reduced medical expenses (insurance) because you go on Medicare
You are no longer going to work: at the minimum, less gas and insurance from commute, no separate wardrobe, lunches out at work, etc.
Your kids may have flown the nest recently (particularly if you paid for college)
And, you may be downsizing your house
Finally, you will begin to collect Social Security, which will replace a portion of your income.

Some of these are quite concrete, but a lot of traditional retirement scenarios will put you in the 70% range.  As the answers you have received So far show, it has no bearing on the path to early retirement in general, and the general lifestyle espoused by MMM, in particular.  If you are here to learn, understand the 70% rule is barking up the wrong tree.

secondcor521

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #6 on: April 01, 2020, 08:38:32 PM »
A better rule, which works for FIRE situations, is 100% of what you're spending on your life now, increased by those things you'll spend more on in retirement and decreased by those things you'll spend less on in retirement, *assuming* that you're just FIREing and not making any other major life changes at the same time (like moving far away or having a child or changing your marital status).

A shorter version of this that also works pretty well is "about what you're spending now", because the adjustments tend to cancel out most of the time or the decreases are larger than the increases so there's a bit of a buffer.

TLDR is you're right in your thinking and you can probably ignore the generic 70% thing.

HotTubes

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #7 on: April 01, 2020, 08:54:15 PM »
Makes sense - it's just funny how everyone quotes this 70% back to me.  My poor sister is working herself to the bone at age 65 because she thinks she has to replace almost everything she earns now, even though she is thrifty and could easily retire on her 401k and SS.  I can't convince her to just run the numbers of what she has and what she spends and know that she is good to retire now.





Loren Ver

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #8 on: April 02, 2020, 02:49:01 PM »
Funny what you learn when you ask the question to the people that are actually doing the thing you want to do :D.

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #9 on: April 02, 2020, 07:13:41 PM »
Thanks everyone - helpful insights

ROF Expat

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #10 on: April 03, 2020, 05:17:00 AM »
It sounds as if you've thought out your current spending levels pretty carefully, and there's no reason to think it won't apply in retirement.  That said, although some of my expenses have gone down in retirement (no more suits and ties), a lot of my other expenses have gone up.   I have a lot more time on my hands so my hobby and travel costs have gone up substantially and I expect that they will stay high for a long time.  YMMV.

Fishindude

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #11 on: April 03, 2020, 07:21:29 AM »
I was always in the camp that I didn't expect my spending to go down any in retirement, and have budgeted accordingly.

bmjohnson35

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #12 on: April 03, 2020, 08:46:11 AM »

We have been debt free for a few years now. Once you get to that milestone (for those who include it in their plan), you can simply track your actual expenses.  It's relatively straight-forward.  Keep in mind, that you should always factor in the unplanned expenses, such as expenses associated with your "things" or your health (repair costs or hospital stays).  You should also consider major purchases (cars, major appliances, etc.).  You should also factor in future economic downturns. Your personal income source(s) also affect your sensitivity to the state of the economy.  Beyond that, it's simply knowing your expenses and planning accordingly.

If you follow the masses, you may never retire.

BJ



HotTubes

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #13 on: April 03, 2020, 10:07:45 AM »
Tracking my expenses, I'm finding about 600/month in work-related things, 1000/month if we go down to one car in retirement.

I think my work life cost (clothes, lunches, travel) is pretty substantial by MMM standards, so I fully expect to see a drop.  I'm thinking that those who didn't see a drop in income might have been able to be Mustachian at work, while I can't be.

I know it's safer to budget at my work level, but I'm trying to not build in multiple layers of hedging and just trying to be as accurate as possible. 

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #14 on: April 05, 2020, 04:02:56 AM »
I have been around here awhile and other boards and never heard the 70% rule either not that that really matters. We simply used/budgeted for 2 years our expenses and added 10% to that x 30 years. Finding that to be a bit conservative but helps go through times like now with market downturns.

bmjohnson35

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #15 on: April 05, 2020, 08:48:33 AM »

Forgot to mention inflation.  Remember that the value of money changes over time.  Another way to look at it is that things cost more in the future.  I personally forecast a 3% inflation rate over the long term, but you can do your own research and decide how much you want factor into your plan. 

BJ

HenryDavid

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #16 on: April 06, 2020, 09:30:43 AM »
It's weird how resistant people can be to simply tracking expenses.
Track 'em.  Use a credit card for everything, download the statements, put 'em in a spreadsheet. Or write 'em down.
Just watch for a year.
Then add it up, ask yourself whether you're fine with the picture you get.

But time after time I have these conversations where people say "oh I could never do that."
Why not? If you don't do it, you're flying blind.
If you do it, you can answer your own question about the 70% rule.

HotTubes

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #17 on: April 06, 2020, 10:29:01 AM »
^^^  I think/hope I noted that we've tracked our expenses for years. We have a good handle on what we spend now, as worker bees.

My questions were really two-fold - why the resiliency of the 70% rule (by the way, even the SS Admin references it) and are there any things that I'm missing as a non-retired person? Hidden costs, things to be aware of, etc.


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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #18 on: April 06, 2020, 10:41:02 AM »
^^^  I think/hope I noted that we've tracked our expenses for years. We have a good handle on what we spend now, as worker bees.

My questions were really two-fold - why the resiliency of the 70% rule (by the way, even the SS Admin references it) and are there any things that I'm missing as a non-retired person? Hidden costs, things to be aware of, etc.

I'm guessing the 70% came from studies and averages, etc.  I bet what is being averaged in includes 'some' percentage of people having debt (incl mortgage debt) etc, maybe reduction in taxes.  On its face it seems reasonable to me just because the difference is prob about the amount of a mortgage and student loan payment I had before percentage-wise.  I also think the idea of spending going down as you get older in retirement is fairly accurate and so means 70% maybe accurate at one age but maybe not another, and important to consider the early retiree (my 75yo parents don't go anywhere as its difficult, but if they were retired at 45 they would have traveled the world all the time I bet, dad would have have bought a big bass boat, etc). 

secondcor521

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #19 on: April 06, 2020, 10:45:58 AM »
^^^  I think/hope I noted that we've tracked our expenses for years. We have a good handle on what we spend now, as worker bees.

My questions were really two-fold - why the resiliency of the 70% rule (by the way, even the SS Admin references it) and are there any things that I'm missing as a non-retired person? Hidden costs, things to be aware of, etc.

@reeshau's post earlier outlines the fundamental reason the 70% (also sometimes the 80%) rule sticks around.  It's mostly because most people spend such a high percentage of their income that they need to work until they switch over to SS at age 65 - that is, "traditional" retirement.  That is far different than FIRE.

There are a couple of other minor reasons:

1.  Financial advisors and SS are biased towards recommending that people work longer.  It's much better, from their perspective, to have someone work longer and have too much money and possibly worked too long, than have someone retire too early and run out of money and have to, proverbially speaking, eat cat food.

2.  Financial advisors make money by repeated advising sessions and assets under management.  The longer you work, the more money they make.

...

As far as your second question, if you've been tracking for years, probably the main categories to think about are:

1.  Expensive things that don't come along very often.  New cars, big home maintenance projects like roof replacements, kids college, stuff like that.  These are things that might not have been captured in your tracking thus far but would be big enough to have an impact on your budget.

2.  New expenses that come with being retired.  Most of these are, strictly speaking, optional.  But this would include the cost of moving if you decide you want to move after retirement, and, more commonly, higher travel expenses if you want to travel.

3.  Some people plan for higher end-of-life expenses such as moving into a retirement home and higher end-of-life medical expenses.  Some people cover this with LTC insurance or excess savings.  If you're on the younger side this could be something that you could perhaps hand-wave as it's too far out and too variable to sufficiently plan.

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Re: Can't figure out the "70% rule" or retirement budgeting generally
« Reply #20 on: April 06, 2020, 12:06:58 PM »
Thanks everyone, those were pretty much my operating principles and thoughts just wanted to make sure I wasn’t missing anything or any perspective