Sunday, March 18, 2007

Is 80 Percent Required?

If your close to retirement and trying to determine if you will have enough money you won't have to look too far before finding the estimate 'that you need 80% of your pre-retirement income in order to maintain the same standard of living after retirement.' But is that valid?

Eighty (80%) percent is a daunting number that could easily scare off many faint hearted potential early retirees. That's a real shame.

Although "How much?" is a critical question, I was only able to find fussy answers. For example, I spent 3 days at a retirement seminar waiting for the answer to this burning question but never got one.

During my research I recall seeing 60 percent and 80 percent estimates. That's quite a range. Fortunately, I had my cash flow records so I was able to do my own analysis. I didn't look at things from just a percentage basis. My minimum amount was that we would have to be able to live in the same fashion as we had before retirement.

I made a spread sheet in Excel that included estimated spending and incomes for 15 years into the future. I kept everything in today's dollars since my pension was indexed for inflation. I found that we would start out fine and things would improve as Canada Pension Plan and Old Age Security came on line for both of us.

Other blogs have dealt with this same question.

In his post, "Why I Won't Need 80 %" at Retire At 45 blog, S. B. writes... "...after retirement I won't need to be saving money". S. B. has been saving a wopping 40 % of his income.

In my case, the elimination of "voluntary savings" was also an important factor.

If your "socking it away big time" leading up to "pulling the pin" you can think of your savings as a deduction from income - one that will no longer be there after retirement. Saving a lot means you are living well below your means. It can make a big difference.

I must admit that the thought of no longer saving a lot after retirement made me a little nervous since I had been doing it for so many years. Old habits are hard to break. My safety factor with respect to finances was very large.

Million Dollar Journey's post "Retiring Early Part I (The Expenses)", estimated that 54 percent would meet their needs. This post made me wonder about my actual percentage.

Of course it is never just about percentage. A lot of personal factors come into play. We own our own home, we have no other debt, and we have downsized to one car. We are still driving an older car. My spending estimates included an amount saved each year for the next car.

Our life style has always been relatively inexpensive...going to the beach, for walks, canoeing etc. That hasn't changed except we have a much longer season to do outdoor activities (all year) and many more opportunities for these types of activities on Vancouver Island.

The sum of pension income plus interest from investments is about 47 percent of our family income prior to retirement. This percentage will increase over time. If CPP and OAS remain at current levels our percentage rises to a maximum of 62 percent.

As planned, we spent some savings to pay for our more expensive home (not better) on Vancouver Island (compared to Winnipeg prices). There was also the savings spent to buy the boat and savings earmarked for annual boating costs prior to age 60 when CPP starts coming. Savings are bridge-financing the boating hobby in the early years.

You might be wondering...How do you find it, is 47 % enough? If we had more income we could take expensive winter vacations etc. For now, I'm satisfied enough that I'm not out looking for a job.


S. B. said...

That is really great that you have a pension that is inflation indexed! In the US, I believe most company pensions are fixed, although it is true that Social Security is inflation indexed. My company pension is definitely fixed.

Have you read the book entitled "The Number"? I was very excited to read an entire book covering the question of how much money one needs to retire. Unfortunately, I was very disappointed. The auther spent the entire book wandering through vague notions about lifestyles and anecdotes about people and so forth. Only in the last chapter are there any real calculations, and that was just a fall back to 80% of pre-retirement income and make sure to withdraw 4% per year.

Thanks for writing down your personal findings. While there are probably a thousand different ways to make early retirement work, it cannot be denied that there is wisdom to be learned from someone who has been through the process. I am interested in how things work out for you 5 years and 10 years down the road, as I think that probably holds some insights for those of us coming behind you in a few years.

Canadian Money said...

Hi s.b.,

Thanks for stopping by.

I haven't read the book "The Number". Glad you found my experience helpful.

There certainly are a number of personal variables to consider and even different possible answers for each of us.

Some of the personal variables can change later in life, closer to retirement, making it either easier or more difficult to leave the workplace behind.

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