Your Current Income Has Nothing to Do With Your Retirement Income

I’m starting to develop a pet peeve. It started out small, about the size of a flea, but now it’s morphed into a rather large beast about the size of a lion. It has to do with everyone constantly stating things along the line of ‘how can you live on $30,000 per year when your income was $70,000 before retirement?’

Let’s get this completely straight. Would you ask a fish about living in a tree? No, good. Because a fish living in a tree has about the same relationship as your pre retirement income does to your retirement income. There really isn’t one. You see retirement has not much to do with your current income, but rather everything to do with your current spending.

I don’t care what you make, but if your living off $2000/month you need about $2000/month in retirement.  If you make $100,000 or $50,000 a year, that only determines how much you have left over to save for an early retirement.

So if you sit down with an adviser some day and they ask you about your income to help you plan your retirement.  You have my permission to give them a blank stare and then use a snide remark of your choice.

10 thoughts on “Your Current Income Has Nothing to Do With Your Retirement Income”

  1. I wholeheartedly agree with you – anybody who says that you will “require” X percent of your pre-retirement income while retired is trying to take a broad generalization and apply it to your specific situation. That generalization doesn’t apply to people who save a significant chunk of their income for retirement.

    Problem is, though, that for most people their pre-retirement (after tax) income and their pre-retirement spending are often nearly identical. 🙁

  2. The problem with this theory though is that generally people don’t save very much of their income unless they are specifically told to or forced to. So the best way that advisors have thought up to actually get some people to save enough money to live is to tell them they need twice as much as they do, that way when they hit 50% of their savings goal you have a success.

    It’s kind of like the insurance myth that you need 750K or 1M of life insurance. I very much doubt that in a two income family. I have just enough to cover all of our debts so the family will be free and clear in a house and a car, they get two years salary and enough to go back to school for those two years. If they got 750K though I would be willing to bet they would go hog wild and spend themselves right back to where they started.

    If they can’t make it debt free and living expense free for two years to get things on track I think they have far more to worry about than insurance.

  3. As usual, I agree with you completely. I think people biggest difficulty in this arena is they often have *no* idea how much they’re actually spending on a monthly (or yearly) basis, so they’d probably just blink a couple of times and make up a number if someone asked them about their spending (which, to perhaps give them the benefit of the doubt, is what the financial advisor may be trying to avoid when they work based on their income, as most people actually do know that).

  4. People also often forget about payroll taxes. When you’re an employee you owe EI, CPP, plus your income is taxed at the full rate.

    When you retire you no longer owe EI and CPP premiums and you may be able to choose the type of income you receive (dividends vs interest).

  5. Right on!

    Example…before retirement I spent about $20,000 on income tax. Last year my income tax was under $3,000. Now that’s progress.

    The fundamental problem… is that people don’t really know where they are spending their money. It takes some time and basic accounting knowledge to figure it out. I described how to do this in a very simple way in my post “Cash Flow Tracking…A Simple Plan” on March 16, 2007.

    Once one knows where the money has gone for a good period of time, at least one year to cover all spending categories, the costs, that reduce or disappear after retirement, become evident.

  6. I agree with you that spending habits dictate to a large extent how much you will need to save, but to say that pre-retirement income has nothing to do retirement income is ignoring the fact that most people work up to a comfort of life as afforded by their pre-retirement income.

    For an advisor to look at pre-retirement income only is lazy, but I think it’s a good generalized indicator for what retirement income is require to *maintain* the same lifestyle that the retiree has become accustomed to. Especially when it’s a trivial matter to deduct savings (RSP, investments, penny jar) from the income figure to get a rough estimate of spending.

  7. Everyone,

    Thanks for the feedback.

    Traciatim,

    I have to disagree somewhat. I think giving a person an impossible savings goal is a bit cruel. They go through so much worry because they are fixated on that number and then to say afterward go retire now at the 50% mark. They would have doubts about their adviser and there wouldn’t be any trust that they have enough.

    G-Unit,

    You do have a point that income can provide a ‘rough’ indication of spending with a little math. I just think people focus on the income number too much and over estimate their spending requirement because of it. Some people just don’t get how much of their income is going to tax/CPP/EI (see CM’s comment above for an example).

    Tim

  8. You are completely right. As an early-retired, I can confirm that what you need depends entirely on what you spend and what you are willing not to spend.
    Don’t believe all the bogus hype about needing this or that percentage. Track your monthly spending, major purchases, vacations, medical/dental expenses, etc. before retirement. If you want to keep living like that after retirement, obviously you need to be able to pay for it somehow. Or give it up. Or take a small job or contract to earn enough to afford it. It’s a simple as that, there is no magic formula.
    My provincial government pension — after 30 years of paying huge monthly sums into the pension fund — is about 60% of my pre-pension gross income. I also have contract earnings. By choice. Financial planners would say that isn’t enough, especially as I have a small mortgage and other debt. But I’m here to tell you it is. And in the most expensive real estate market in the country!

    Another major thing to consider is how much it will cost you to be cared for in your later years when you need assisted living, extended care or home support. This is a major piece that is not discussed given enough thought. If you want a high-end lifestyle at that stage, you will have to pay for it. In BC, it can cost you $2500 – $7,000 a month for accommodation, meals and services. Subsidy is, of course, much cheaper. But there are long waiting lists for subsidized assisted living, and the accommodation is not necessarily ideal.

    Live your dreams now 🙂

  9. Jane,

    Thanks for the feedback. I love to hear from early retirees on how things are working out for them.

    I have to confess I haven’t thought about late life care all that much. That is something to consider as I get older and I watch my parents age.

    Take care,
    Tim

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