The key to living in retirement is a income stream. The ideal is a pension and Social Security. 59% of current retirees have a pension, but only about 15% of today’s private sector workers do.
Future retirees must create their own income stream and the more stable that is the better.
Many people are focused on a budget during retirement thinking they can plan between now and retirement and for thirty years thereafter. That would be quite an accomplishment.
The are many ways to obtain income in retirement. Among them buy an annuity at retirement for a steady income stream, withdraw a fixed percentage – the 4% rule – from current investments each year or take expenses from investments as needed.
You probably don’t want to follow the Dave Ramsey advice of taking 8-12% withdrawals either – original video here,
Keep in mind the 4% (or other percent) withdrawal strategy is not necessarily a steady income stream and includes a measure of risk.
A combination of several streams is also possible and better in my opinion – Social Security, dividends and interest, an immediate annuity and withdrawals from investments together provide a stable, but variable income with some inflation protection- and it can be done on average incomes accumulating over a working lifetime.
As you can read below some people have their own plan, even to the extent of assuming their different activity stages of retirement. Note also the use of “if” when referring to the plans success. This is basically the take money as needed and budgeted for approach, something I find risking, indeed frightening.
I am working backwards since I always liked making budgets, so my plan is based on my spending needs and the tiers of retirement (“go-go, slow, slower, add’l care-taking). In addition I have large one-time fun and necessary expenses that are foreseeable in the future written into the budget as well (such as refinishing floors, cabinets, gifts, RV etc).
If a plan such as this is “successful” and I can live the lifestyle I am used to, then that’s all that matters. I have no idea what my percentage (of withdrawal) will be. Often it is the large expenses, not our regular living expenses that can raise havoc so play with the numbers if you know what you would like to do in retirement.
While working, a person’s standard of living is (or should be) based on their income – more or less stable each month. Without going into debt, they can only spend what they earn and keep. Beyond basic living expenses additional spending, say a vacation, must (should) be saved for from that that income,. There is no more if a person is living within his means. If you live like that, do you need a detailed budget? No‼️ because your spending is limited by your income.
Why is it any different in retirement? Why do you need a detailed budget? You don’t‼️ Your reliable income stream sets your spending just as when working including accumulating savings for large spending beyond the basics.
A key question and one with many answers is what percentage of working base pay do you need to replace in retirement? Some people spend many hours calculating that or I should say estimating it. I have people tell me it is 60%,70%, 80%. The rationale is that in retirement many expenses, even taxes will be less, there is no need to continue saving. Don’t count on it.
If you earn $75,000 per year, why, especially considering future inflation, would you want to begin retirement with even a 20% reduction?
Don’t assume expenses – spending – will be less throughout a retired lifetime. That is highly unlikely. New spending will pop up, discretionary spending will be desirable.
QUINNSCOMMENTARY 
If someone invested $250 monthly ($3,000 annually) for the latest 40-year period in the S&P 500 you had in excess of $1.6 million on 12/31/22. A fine old fund we have used in this house for decades $1.4 million.
If you use the 8% average for 40-years I assume you are simply compounding every year at 8% which is not what markets do–you would need a CD or bank account that yielded 8% annually –no more–no less for 40 consecutive years.
The S&P 500 with $250 monthly had an average annual return of 10.30% for the 40-year period ending in 2022. But the closest it came to that was in 2004 at +10.74%. In 2008 it lost 36.55% and last year it lost 18.01%.
From 1982 to 1999 it had one losing year–1990 at -3.06%.
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The key component in retirement is what you spend–one has to spend very carefully–my father was a factory worker and my mother a homemaker but retirement income was no issue–a fixed pension and Social Security–100% for him and 50% of his for her–health care was Medicare and company health insurance in retirement.–They were very frugal all their lives.
The 4% +3% works very well and allows for an increase annually–ran a hypothetical beginning 1/1/1937 as that was the largest decline since 1933 (-50%)–in ’37 the S&P lost 35% but $100,000 invested in the Index with a 4% withdrawal that year and an increase of 3% ($300) in 1938 shows over rolling 30-year periods one withdrew close to $190,000 for every 30-year period–one never ran out of money–worst case was ’37 to’67 where, at the end of 1967 the account was worth well in excess of $400,000.
Dividends can and do fluctuate but are a great source of income in retirement–if you don’t have a pension then an immediate annuity can be a valuable piece of the puzzle.
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The retirement income amount will depend greatly on what the IRA/401k, taxable investments turn out to be at time to quit work. If there is no pension then Social Security will do the heavy lifting for a huge number of retirees. I don’t believe that saving an additional 10% on top of the payroll tax will get a worker earning a median age over his/her lifetime will get the job done. Maybe but it doesn’t seem likely to me.
The idea of interest and dividends for income as well as annual withdrawal of RMDs is good but it takes a large amount to create an equivalent to 100% of working income. I keep reading of the accumulated balances of workers nearing retirement and it won’t provide the amount of savings necessary to get anywhere near replacing 100% of income. I personally don’t count annuities because they tend to payoff better at a later start date and work better for those who exceed the average lifespan.
How to get the median earning worker at least 15 times their annual salary at retirement is the big question, not how to spend after they retire.
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Keep in mind, for the average person Social Security replaces about 40% of income so the goal is to replace the other 60%. When I say annuities it’s only immediate annuities for the guaranteed income stream and purchased with only a portion of investments.
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If a worker earning $30,000 at age 20 saved 10% until age 60 they could easily have $839,364.85 (8% interested assumed) BUT THAT ONLY ASSUMES 10% of the $30,000 for forty years. 10% of increasing wages over those years would be much more and adjust for inflation.
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