Monday, January 4, 2010

Retirement Percentages

OK, last post in this series...I think.

So what's the magic number. 40% of your last years income, 70%, 100%, or some other number? I don't think there is a magic number, but here are my thoughts anyhow.

The argument for 40% of your income is that you spend 30% on investing and 30% on your mortgage. So with 40% you cover all your expenses. But really, I could live with a lot less than that too. In fact, my salary is above average, so I could live on someone else's 40%. Or, if I become a CFO, I could make over 250,000 a year (hard to imagine, but I can dream). So 40% of that might be more than enough.

For me though, I don't want to settle with that minimum. After all, I don't have to go to school to be a junior accountant, but I am so that I can make more money. I'm not all about the money, but it only makes sense to me to get paid as much as I can doing what I love to do. I think it's just smart. So, if I'm not settling for a lower salary now, why would I want to settle for one later.

I plan to pay my home off well before I retire. When I do so, I'll then be able to spend at 70% of my income (using the same numbers previously discussed). I suppose I could save it all, or invest it all, but I'm looking forward to the increased standard of living. More vacation time at that point and I'd like to use it.

Assuming I put the last 30% towards retirement, it makes sense that financial planners tell you you need to make 70% of your last years income. After all, you've been living off of 40-70% most of your working life. You're retired so you no longer need to put money aside for it, so 70% make sense.

However, just like when I've paid off my home I don't want to save the rest I want to spend it. The same logic applies to my retirement. Once it's funded, why wouldn't I increase my spending to 100%?

OK, admittedly I don't need 100% or even 70%. But I don't need to earn 250,000 a year either. If I do earn that much though, I don't want to think of retirement as taking a pay cut. I want to look forward to it and look forward to spending the time and money with my wife as we do whatever we decide to do with our time. If we have any extra we can give it away. I plan to anyhow, but that's another topic.

I plan to enjoy life and my work as I work towards retirement as you never know what will happen in your life. At the same time I plan to enjoy my retirement for as long as possible.

Love to hear your thoughts and any numbers you think will work for you. If you haven't given retirement much thought I highly recommend it!


  1. What do you spend to live. Deduct what won't apply in retirement. Rather than a percentage of anything, base your needs on what you actually spend.

  2. @Anon: I was reading a blog that got me wondering the same thing. That would give me my basic needs, but I don't want to settle for that. I could live off of less money now as many people actually do. I don't want to over consume, but I do have a weakness for travel. As my income increases and even more so when I retire, I'd like to travel more and more. So if I can maintain 100% of my income when I retire while I've reduced my expenses, this should become even easier to do.

    Besides I'm not in a hurry to retire, so if I live frugally and work until I'm 65, I'll have more than I need both now and later anyhow. It is good advice for anyone looking to retire as early as possible though.