REPLACEMENT INCOME

80% REPLACEMENT INCOME DOES NOT MAKE SENSE

 

All the calculations that you do for retirement and many of the calculators, advisors and everybody (everybody not in the FIRE) that you talk to says you need 80% of your last income. Whaaaat! It does not make any sense.

 

Let´s make some numbers

 

We are going to use $100.000/year for income to make easy calculations.

 

-If you need 80% you need $80.000 when you retire.

 

-But, wait, if you have been saving and investing, let´s say 50% (not uncommon in the FIRE community, actually, it´s kind of the entry level if you are pursuing FIRE). Then, you have been living on 50% of your income, that´s $50.000, why would you need almost double that amount?

 

-Let´s add taxes. If you have been saving 50% of your income pre-tax, that means you have been saving $50.000. The tax bracket for $100.000 is 24%, that´s, $24.000.

 

-So, you are living on $100.000-taxes($24.000)-savings($50.000)=$26.000. That translates to $2166.6/month. Can you live on that?

 

-So you are actually living on $26.000, more than 3 times less the $80.000 everybody is telling you that you need.

 

Some conclusions

 

If everybody is telling you that you need 80% replacement, and also the nest egg paralleling that, then you are being advise to save 3 times more than what you actually need. I like to have some safety margin, but 3 times more is going to make your goal unattainable and you are more likely to spend more and work less towards achieving FIRE as you feel is too high of a mountain to climb. Don’t be fooled, you need way less. Remember less is more?

 

Like the song . . .

Spending, Saving and Investing

 

By spending less, saving more, and investing strategically, you´ll be able to get away from the crazy 80% replacement rate that does not make any sense, frustrates everyone and forces everyone to stay on the rat race . . .

 

So . . . can you live on $2166.6/month? Remember, the total nest egg that you need is way less than what everybody wants you to think.

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