Retiring on 70% of your income

One person commented on my most recent 401(k) post (thanks, Ming!).
Although the main point of that entry was a way to jazz up the returns within your defined contribution plan (allocate most of your contributions towards stock mutual funds, and transfer more in during down stock market periods), I mentioned that most people underestimate the amount of money they will need in retirement: those assuming they could retire on 70% to 80% of their pre-retirement income could be in for a nasty shock. Ming took exception to this.

(I love comments, by the way, positive or negative – please keep them coming!)

His arguments make sense, by the way, for him. One's income and lifesytyle are so personal that you can't pigeonhole everything into nice, neat packages and say, “Voila, here's your plan!” Everyone's idea of what the ideal retirement situation will be different, and there is no “right” or “wrong.” Depending on expectations and what makes you comfortable, you might need thousands a month more, or less, than someone else in your golden years. The two things I would consider sad, though. are to have the amount in your retirement fund limit what you want to do, or to run out before you die.

Comment:
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I'd have to say to a certain extent I disagree.
When you retire, you'll typically need less than what you need now. Especially if you've purchased a home. I honestly don't expect to continue giving my mortgage company any more money after I've paid off my mortgage. Honestly, my mortgage is about 30% of my current living expense, so I don't believe my standard of living would be lower when I retire at only 70% of my current income. And I can see the justification for people believing that they can live off 70% of their current income too.
Personally, I don't know if I'd stay in California eiher. I could easily move to another state where there is little or no property tax (ie. TX) or where there is no sales tax (ie. OR). I could even move up to Alaska (AK) where the US govt would give me a stipend to live there and make my home up there. Though I don't know if I could handle so many months with no sun light.
Now in terms of medical expenses, we'll just put a couple of democrats like Hiliary or Obama in office and all our medical expenses will be covered... or we could simply move to Canada.
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So – the major points are 1) owning one's home will decrease your expenses 2) moving to lower income/tax advantaged locations 3) universal healthcare.

Let's deal with #3 first – and although I recognize the humor, let's treat this seriously. I don't have exact numbers in front of me but Medicare cost about 1/3 of a TRILLION dollars in 2006. I would submit that expanding Medicare to everyone, and having it cover “everything” will cost $4+ trillion dollars. With the US Gross Domestic Product at around $13T, I just don't see this happening. Even expanding it slightly will increase taxes for most of us.
(For a good read on both Social Security and Medicare funding, read http://www.arlingtoninstitute.org/wbp/economic-collapse/438#)

Regarding #1, of course you won't be paying off the mortgage forever. Here a couple thoughts, however.
Once the mortgage payment is gone, so is that sweet interest deduction. Do me a favor and recalculate what your taxes would have been this last year without that! And I keep harping on it – but taxes in general will be going up in the future!
Okay, so you're still looking at much more disposable income once the mortgage is gone. Recall my other point; once you are not spending 8+ hours a day at a job, you will want to DO something with that time. Recreational activities will become a larger percentage of your expenses – maybe not 30% but a good chunk of it. Will you enjoy dining out more? Travel? That hobby you always wanted to try your hand at?
Finally, as you get older, and assuming you stay in your house, will you need to spend some money to remodel your house to make it more comfortable and safer?

On #2, there are two points worth mentioning.
The first relates back to your mortgage – now you're selling your house here. When you buy your retirement home, is it a small condo in North Dakota? Or somewhere really nice, with lots of amenities and by the coast in a place where you still pay a “sunshine tax”? If you opt for luxury, you may end up, if not with a new mortgage, then perhaps with not quite the nest egg you thought you had in home equity.
The second is that there really is no such thing as a free lunch. If you move to a state with no income tax, then property taxes or rent is going to kill you. If there is no sales tax, then odds are that you'll see a hefty income tax.

Yes, if you are spending a good percentage now on your mortgage, then you may not need to replace all your income when you retire. But let's shift our focus to instead talk about that retirement and the "bucket" concept.

Ideally you will have multiple “buckets” to dip money out of at retirement. Having different income streams allows you some flexibility in managing income, taxes, and even inheritance issues.

• First, looking at social security, benefits are taxable at 50, 85, or 100% of your payments, depending on your filing status and other taxable income. Given the size of the deficit and the disregard we've paid the trust fund, I think you have to plan on having payments highly means-tested and overall benefits reduced within the next twenty years or so.
• Most people will have some sort of funds within either traditional IRAs or 401(k)s. This too will be counted as taxable income – and again I think you have to at least plan for higher tax rates in the future. However, this portion of your funds is at least to a large degree under your control (most people do not fully fund their 401(k) or IRA at the legal limits). This portion may be one of the largest percentages of your assets at retirement.
• Roth IRA / 401(k)s – the golden goose. PLEASE fund this at the maximum allowed. I truly expect Congress to stop allowing these at some point when they realize they've given away the farm – I only hope they grandfather in existing balances.
• Pensions or other defined benefit plans seem to be going by the wayside. Too many seem to be slashing expected benefits, or coverages for me to be confident in them for the long term.
• Finally, if you have a large amount stashed away on non-retirements funds, congratulations! Being able to cash in a $20,000 CD every year to aid in your expenses, or sell some stocks from your brokerage account to help a child's down payment on their first home is wonderful. Again, I unfortunately just don't see most people having this option, as saving and investing INSTEAD of consuming doesn't seem to come naturally to most of us.

Some of these are beyond our control, such as Social Security. Some, such as brokerage accounts or CDs, are up to you to take the first step. The old saw "He didn't plan to fail -- he just failed to plan" comes to mind. Take the time now to review your budget and decide where you can free up money to invest in your future -- because it will only be as good as YOU make it.

Regards,
Trond