Debunking the 70-80% rule for retirees needing this much pre-retirement income to maintain their lifestyle
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| Vanderbilt Mansion, Hyde Park, NY |
Oscar Wilde: “Simple pleasures are the last healthy refuge in a complex world.”
Recently, I was reading an article from the Money section of MSN, where I came upon an article about the sanctity of needing 70-80% of retiree’s pre-retirement income to maintain his/her lifestyle into retirement. This is something I’ve always read about and known about, since my wife and I decided on our journey of FIRE (financial independence retire early).
The 70-80% rule kind of makes sense as most retirees generally tend to spend about the same (or a bit less) amount of money each month on expenses in retirement vs pre-retirement. Generally speaking, retirees won’t need to spend money on work related things (think work wardrobe, daily commute in a car for most Americans, eating lunch at work, happy hour after hours, etc.), reducing that part of after-retirement budget.
Despite this fact, the reason most retirees spend close to their pre-retirement is thanks to availability of free time, a home mortgage, and needing to let loose after a lifetime of working. Most retirees I know own homes, which means the usual expense of a mortgage (or second mortgage), taxes, maintenance, insurance, utilities, etc. Majority of retirees I know no longer work, but the monthly expenses never seem to go down. Many finance experts will say retirees should spend less per month in retirement, as they no longer need to dress up for work, buy lunches at work, or go on vacations.
My personal experience with retirees tells me otherwise. Since many still own homes, the bulk of the monthly expense, which is typically lodging/housing, still takes up a big chunk. Just because someone no longer works, doesn’t mean they can do away with a vehicle either.
They still need to do chores, like buying groceries, going to a bank, and eating out. Unless someone retires in a major city, it’s difficult to ask most Americans to live without a car. For Americans, having a car equals freedom. It gives us the freedom to explore this huge, great country of ours! Why do you think most car commercials feature iconic destinations like the Grand Canyon, Monument Valley, California’s Pacific Coast Highway, etc.?
Sure, it’s a great marketing ploy, but it’s also true. Everyone, especially Americans, want to explore this great country via the automobile. Doing a cross country trip is on most American’s bucket list of things to do. I know I did, and will always will…
Just because someone is retired, doesn’t mean they’re going to stop eating or stop shopping for stuff. I would argue that because retiree now has more time on his hands, that he’ll have more time to spend! Think about it. We usually spend more money when we’re off work, like on a weekend, on a holiday weekend, or during Christmas to New Year’s break.
Bottom line is that most retirees I know still need about the same amount of money after retirement vs pre-retirement. With more retirees choosing to buy bigger homes in retirement in a recent survey by Del Webb, where 22% of respondents chose to buy bigger homes in retirement, I would argue that they may need more money, not less, in retirement.
This is exactly where the FIRE (financial independence retire early) movement comes into play, at least for us. The notion that retirees need 70-80% may be true for most people, but this isn’t true for everyone. It’s definitely not true for us, or for many FIRE movement retirees.
Before I started this journey to reach FIRE, I thought, like most people, that I needed to have millions to retire. In my way of thinking, retiring early, would no doubt require even more money.
Enter FIRE movement, where the idea that you can reduce your spending, so you can reach financial independence, without saving up millions of dollars was a true eureka moment. This notion changed my life, and changed my thought process.
I honestly don’t think I could’ve saved up millions upon millions of dollars anyway, even if I worked until I dropped dead into my 70’s from sheer exhaustion! What FIRE movement has taught me is to save/invest while reducing my expenses as much as possible.
About 3 years prior to our early retirement date of August 2020, we were well on our way to achieving FIRE. We had reduced our spending, buying necessities only, and none of the usual things homeowners buy to spruce up their homes, like decorations, scented candles, diffusers, ornaments, etc.
In 2019, we got to practice early retirement as my wife quit her job of 10 years. That year, we practiced living on just one income. We really hunkered down and spent even less per month. In hindsight, I think this was a great period of enlightenment for us.
Unlike most people who are thinking of retiring, but who rarely get the opportunity to see how retirement is actually like, we were lucky in that we got to practice and learn to live with less that year. That year prepared us for what’s to come the following year, our actual jumping off point for our early retirement.
Here are the ways we’re living with much less than the typical 70-80% of pre-retirement income. Note: I’m comparing the year 2018 (when both of us worked) to now (when both are retired).
- Housing: From around $2,800 per month to around $1,300 per month
- Transportation: From around $1,000 to around $500
- Food: From around $800 to around $600
- Miscellaneous: From around $400 to around $100
Part of the $400 miscellaneous budget also went to things like entertainment, and anything else that pops up. Think dentist visits, annual physical checkup, etc…
Since early retirement, most of what we do is buying takeout food, which is part of our usual food budget. We supplement it with our miscellaneous budget as needed, or when we’re doing something fun like going to a museum, or catching a classical music concert.
Key takeaway:
Since retirement, we’re spending about 50% of what we used to spend on an average month when we’re staying at an AirBnB rental these days. In both scenarios, there were times when the expenses would go up or down, depending on other factors, like emergencies, or the holidays. The above figures represent our typical monthly budget however.
When we’re not staying at an AirBnB rental, then our housing budget goes down to $0, as when we’re staying with our family, typically our parents. We’ve been staying with our family for 4 months out of the year last two years, and if we average that out over a 12 month period, our housing budget is then around $870, and not $1300. ($1300 x 8 months at AirBnB, then divided by 12 months)
So, in reality, we’re spending roughly a little over 40% in retirement vs when we both worked. Although our situation is unique, and not common with most FIRE movement crowd, it works for us right now.
We get to spend plenty of time with our family and travel on our own, creating a good balance. By doing this, we can balance our budget, and make our parents happy (and us!).
For us, the ultimate goal of life is to live a happy and a balanced life. We like the fact we can still live a nomadic lifestyle for 8 months out of a year, but still have plenty of time left over to spend with our family.
Remember, everything is fleeting. Our time with our parents and family is incredibly short lived. We must all try to create as many happy memories with them as we possibly can. The same goes for life in general. Life itself is fleeting and incredibly short, in the grand scheme of things. Learn to appreciate life and do the things that make you happy…
In conclusion:
The generally believed notion of needing 70-80% of your pre-retirement income in retirement is simply not true. We are living proof that with right mindset, minimalism, careful budgeting, and enjoying the simple things in life, almost anyone can live with half, or better yet, less than half of pre-retirement income.
We once thought we needed millions upon millions of dollars to retire. The thought of early retirement wasn’t even a possibility until we realized the concepts of FIRE (financial independence retire early) movement, of reducing monthly expenses to save/invest as much as possible.
This exact concept of reducing monthly expenses still come in handy in our early retirement journey. We are able to enjoy our nomadic lifestyle without busting our budget. I encourage anyone interested in reaching financial independence to practice living with less, to practice enjoying the little things, to enjoy time with your loved ones, and to simply enjoy this journey called life.
Thank you all for reading and good luck in your FIRE journey!
Jake
Wandering Money Pig
