Why you need to replace 100% of base pay/salary when starting retirement

Caution my views expressed here are roundly criticized. I’ve been told to stop saying what I think. Hardly anyone agrees with me. I’ve been called a troll when I post my views. Hey, it’s up to you. It’s your life and your retirement.

Let’s say you are earning $65,000 (base pay) and you will retire in a few months. How much of that $65,000 income will you need in retirement?

My view is that retirement should start by replacing 100% of base pay/salary. This level of replacement is especially important for moderate to low income retirees who are unlikely to have significant assets. Remember, for moderate to middle income Americans Social Security will replace 30-40% of pre-retirement income.

Conventional wisdom says 70-80% or $45,500 to $52,000 income replacement in this example. That is on the basis that you will not be paying Social Security and Medicare payroll taxes and you will not be saving for retirement.

However, other spending is likely to increase in retirement, although a big chunk may be discretionary. However, IMO discretionary spending is part of an enjoyable retirement.

• Health insurance premiums will be an added expense for many
• Some spending on health care may increase, especially prescription drugs and for some a form of long-term care even if it is only in-home assistance
• Property taxes/rent will keep rising
• Family members may need financial assistance
• Some measure of saving should continue to maintain emergency/contingency spending . I suggest 3-5% of income.
• Activities, travel and hobbies will be an added expense. Discretionary, yes, but isn’t this what retirement is about?

Of course, if you pay off a mortgage or other debt immediately before retiring that is a factor as well, but not if the debt was gone several years before retirement because living expenses have already adjusted.

Many Americans do enter retirement with a mortgage.

Retirees have other debt as well.

In addition, inflation is always a factor. Replacing 70% of income may sound good at retirement, perhaps not so good ten years later. You need a way, a cushion, to deal with rising costs and for most, a Social Security COLA will not be enough.

Ten years after 2013 (2023) spending the equivalent of $45,000 (70%) requires $59,293. The $52,000 80% becomes $67,763. Do you want to risk your investments doing the job?

For those living primarily off investments, you need a cushion to absorb downturns in the stock market. While advisable, not many middle income retirees have a year or two of expenses held in cash reserves.

It’s up to you, begin retirement with an income equal to 70% of working base pay and make that work for decades.

or

Be more cautious and strive for 100% base pay replacement.
If I’m wrong, you’ll have extra money. If 70% is wrong …