Rethinking Our Retirement Income Needs

In retirement, I've planned to generate 80% of my pre-retirement income on an annual basis.   This was based the common rule of thumb of needing 80% of one's working income in retirement.  It's been five years since I took early retirement, and we've been comfortably living on 41% of our pre-retirement income for 3 1/2 years.   Based on this experience, I will continue to target for 80% income to salary ratio, but recognize we only need 1/2 that much for now.

Here's the reasons we will need less:

1. Living below means when working.    In my last 10 years of working, we generally were saving at least 20% of my salary.  So we already were living at 80% of my pre-retirement income before retiring.   80% of 80% is 64%, which would be the amount of pre-retirement income that is needed.
2. Paid off mortgage.  In May 2009, we paid off our mortgage and reduced our monthly expenses by 24%.   76% of 64% is 49%.
3. Living expenses.  Our non-mortgage monthly living expenses haven't changed much.  Net some expenses went down but retiree health care insurance eliminate the savings.
4. Taxes.  Although I haven't explicitly done the calculation, a reduction in income taxes has also contributed.  Since our taxable income has been less in retirement, we play a lower income tax rate and qualify for more tax credits.   That probably accounts for most of the additional 8% reduction in our expenses

I recognize that major cost of retirement, health care costs, haven't impacted us yet.  Although our health care insurance quadrupled, we still have good health and don't have much is additional out of pocket spending.  Of course, that could change.  Therefore, we will plan on needing 41% of pre-retirement income for the near term, but continue to (try to) generate 80% of my pre-retirement income to cover future health care needs.


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This is not financial advice. Please consult a professional advisor.

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