How much does income affect your post-retirement lifestyle stability?

Published July 13, 2015   Posted in How to Retire

One of the most spirited debates within the early retirement community revolves around the influence that a high level of savings (as well as income) has on a person’s ability to retire early.  I have argued in the past that although a high income can help, an aggressive savings schedule is a far better measure to determine a person’s fitness for early retirement.

From our honeymoon on Maui

From our honeymoon on Maui

My rationale was simple: it is a person’s lifestyle that ultimately determines how long he or she can survive without a full time job post-retirement.  Meaning, a more frugal lifestyle will generally enable earlier retirement than a less frugal lifestyle, regardless of income.

But yet, I would be remiss if I did not address the obvious monkey in the room.

It only makes sense that the more money a person makes, the more money a person can save.  Clearly, a person who socks away $250,000 a year could certainly retire before a person who is only able to save $25,000 a year.  Most likely, a savings rate of $250,000 a year is due to a very high level of income, and a savings rate of $25,000 is due to an income far less.

Based on the numbers alone, I think we can all agree that the person who saves $250k a year CAN retire before a person who saves $25k a year…but only with the appropriate lifestyle.

Early retirement comes down to…

In the first paragraph, I talked about a person’s fitness for early retirement.  A person’s “fitness” is his or her ability to retire based on savings and spending post-retirement.  Savings will include all accessible retirement accounts like brokerage accounts, IRAs and 401ks and their associated capital gains, as well as social security or other sources of income from side businesses, rental properties or anything else that generates cash.

Spending is the biggest factor in our post-retirement lifestyles.  For most, our spending level post-retirement is directly related to the amount of capital we have saved and continue to earn, along with an estimated rate of investment return – typically around 4%, but can vary.

Early retirement comes down to our ability to live out the rest of our lives by withdrawing from our investments at a rate that will never completely deplete our savings.  If we spend too much, we risk running out of retirement savings.

For example, an annual withdrawal rate of 3 to 4% of our total investment capital is common – meaning, with $1m in investments, a 3% rate of withdrawal amounts to living off of $30,000 a year, while 4% allows $40,000 a year.

The appropriate lifestyle

Let’s revisit the scenario above, comparing a person who saves $250,000 a year with a person who saves just $25,000.  It is only natural to look at both scenarios and give the nod to the higher income person saving $250Gs.  Clearly, this person’s level of savings has better prepared him or her to retire much sooner.

The problem is a person’s level of savings is only half of the early retirement equation.  The other half is dictated by our spending and how quickly we use our savings after we finally decide to retire.  Lifestyle is a big factor in completing this equation.

Here is the rub: If the person who saved at a rate of 10-times the amount of someone else also spends at a rate of 10-times the amount of someone else, that’s person’s high spending rate, enabled by a high level of income, has reduced that person’s ability to retire earlier than the lower income person.

They might still be able to retire sooner than the lower income person, but the gap has closed significantly.  Imagine that after retirement, your neighbor spends $200,000 a year (to include mortgage, cars, etc), while you only spend $25 or $30k.  Sure, your neighbor probably does have a higher level of savings than you, but that neighbor also needs a higher level of savings just to maintain an expensive lifestyle.

From a percentage standpoint of savings to spending, that person may not be “better off” than you.

This phenomenon is what I like to call post-retirement lifestyle stability.

Investments that increase in total value post-retirement due to capital gains (and any other side income) above and beyond a person’s spending rate indicates a high level of stability.  And naturally, if a person’s level of spending exceeds capital gains and income, that situation implies an unstable lifestyle.

The important element to remember in this debate is income, savings and spending ALONE are relatively meaningless.

What truly matters is how all of these elements play together and how they affect our overall level of post-retirement lifestyle stability.  These elements are crucial to our ability to retire early, and the less money that we spend (both before and after retirement), the easier this whole early retirement thing will ultimately be – regardless of your income or savings.

Can a high level of income and savings make it easier to retire early?  Yes, absolutely – with one crucially important caveat.  One’s level of investment savings and side income must exceed one’s spending.  Otherwise, we might find ourselves looking for part-time work, and our income that we enjoyed pre-retirement won’t matter.

If spending is too high, investments will run dry. -> See, that rhymes, and anything that rhymes has got to be true.

What are you doing NOW to ensure your high level of post-retirement lifestyle stability?

We track our net worth using Personal Capital


24 responses to “How much does income affect your post-retirement lifestyle stability?”

  1. I’m learning that spending doesn’t make me happy. That enables me to keep my expenses “low” from now through financial independence. Keeping low expenses also helps smooth out the ride of financial independence if any big stock market declines were to occur (where most of my nest egg will be). Being nimble is extremely important in FI.

    • Steve says:

      It’s great how easy this all gets once you learn that spending money on stuff isn’t the path towards true happiness. Everything falls into place after that point, enabling the foundation for some seriously aggressive saving. The less you spend, the happier you are?

      It’s an easy equation to solve, and even easier to LIVE! 🙂

  2. Great post Steve!

    I have been spending a lot of time thinking about what really matters most in this journey to financial freedom. Until recently I thought my “One Metric That Matters” was my Net Worth metric.

    However, after careful contemplation I am realizing after getting more granular in the details of my plan to reach a $10M Net Worth by the time I am 48, that my overall savings rate is actually more important than anything right now.

    I think a lot of people including myself (until recently) miss the importance of the savings rate. My model is heavily dependent on my ability to save 50% of my gross income. My contributions alone account for 40% of $4M in Net Worth in my 20 year plan.

    It is not until 10 years into my plan that compounding out paces my savings contributions.

    My households high income and assumptions for that to grow are what make the 20 year plan viable. But it’s the discipline to continue saving 50% of our gross income that makes the entire plan possible.


    • Steve says:

      A high income, coupled with a high level of savings, truly is the best of both worlds. I live in a two-income household and both my wife and I make darn good money, and saving over 70% of our combined income is, like in your situation, setting the chips up for an awesome looking retirement! 🙂

      Thanks for reading, Dominic.

  3. Great post, Steve. This is reminiscent of the Millionaire Next Door, and the idea that people who earn more feel compelled by their station in life to spend more (cars and clothes to match their job, a house in a “good” neighborhood, private schools, country clubs). While we’ve never felt the need to buy into the trappings of wealth, and so have avoided buying new cars, fancy clothes and exclusive memberships, we for sure lived large in the form of dinners out and travel. It was only when we realized that we needed to cut our spending, not just save a lot, in order to succeed at early retirement, that we truly made the switch to a lifestyle of frugality. When we moved from the city to our small town, we deliberately chose to buy in the least exclusive neighborhood, and bought less house than the banks said we could “afford.” We still drive our 11 year old car, though did add a second when we moved to the mountains. And we now eat out far less, and travel on the cheap. The best part is: we really don’t miss anything, or feel like we’re living a miserly existence. So we feel like we can succeed at early retirement, and can’t wait to find out!

    • Steve says:

      Thanks! Totally, when one switches to a lifestyle of frugality, spending almost automatically gets taken care of. Of course the switch can be difficult for people, but that’s quite frankly the toughest part. The rest comes easy.

      And you definitely did the real estate right. Our house happens to be the best house in the neighborhood with the best views, which means the value of everybody else’s essentially brings ours down. We won’t make this mistake again, for sure. 🙂

  4. Stockbeard says:

    Awesome post as always.

    I like that there are two facets to this equation. This is exactly what gives “middle class” families a chance at early retirement when some high income earners will never achieve it. I love that the end of the game is not decided right from the beginning, and that instead everyone actually has a chance. I feel this has been the most powerful lesson for me to understand that RE was a possibility.

    Also: I love the Maui picture, it almost looks like a drawing. HDR?

    • Steve says:

      Thanks Stockbeard! Actually, no HDR on that image – just regular Lightroom post-processing. I’m always amazed at how much detail photo editing software can extract from images, even if the exposure isn’t 100% right. 🙂

  5. When I obtained a full-time job this year, we could have very easily continued living the lifestyle we had (and then some). Dining out, traveling, spending too much on stuff that doesn’t matter–we lived what you noted as an unsustainable lifestyle. We took a hard look at what we were doing and are slowly making changes to be sustainable. Thanks for the great post!

    • Steve says:

      Hi Claudia,

      Good on you for making the lifestyle changes necessary to kick your savings and frugality into high gear. I know that your future self will definitely thank you for it. You are one of the few in this country who isn’t susceptible to lifestyle inflation! 🙂

      Thanks for reading.

  6. Mrs SSC says:

    I’ve always focused on cutting spending in order to increase savings. But you do make a great point – and it is something I worry about. We both make a decent salary, which allows us to still spend a lot, while saving a bunch. I do worry that we will run into problems because right now we are used to having a huge buffer, so that money is not a source of stress for us. But when we are retired and don’t have that safety cushion… I think that is where we will have problems.

    • Steve says:

      Hi Mrs. SSC,

      Definitely take the buffer while you can – nothing wrong with a little wiggle room here and there. But yeah, it will probably be a change (for both you and me) once we finally slip into our retirement lifestyles and start living off of our investments rather than simply contributing towards them. Talk about one giant shift! 🙂

  7. We won’t be able to cut our costs in retirement (if I ever retire completely at all) by a lot. Other than the obvious mortgage issue. But then I’ll probably still have us doing a rental property or two.

    On the other hand, that’s revenue that will help us supplement our retirement accounts, which are currently woefully underfunded. (First, we’ll ramp up IRA savings next year — once we have the $25k we need for a medical expense — then we’ll worry about our mortgage, then a rental property.)

    But we do have several health conditions that will affect expenses even into retirement. So our costs will be similar even as we reach our golden years. Plus I’d like to find the money to travel more. So we’ll just have to focus on not letting our lifestyle costs inflate and cut where we can to spend on what matters. In other words, basic frugality.

  8. I just stumbled across your blog through Twitter and love your blog and this post. I can totally relate! I’ve been a lot more frugal in my spending over the last couple of years and noticed it not only increases my savings for early retirement significantly, but has enabled me to see that I could retire even earlier than I thought… I turn 40 next year and will have my mortgage paid off at the end of next year. Since I track my spending meticulously, I think I can retire anytime… but saving over 70% of my income and seeing my investments grow is so fun. Guess I’m just a finance nerd… Great post! I’m now a Twitter follower. 🙂

    • Steve says:

      Thanks Jen, and congrats on being so darn close to getting your mortgage paid off. That’ got to be a very, very good feeling. Thanks for the follow, and good luck in your drive towards financial independence and early retirement!

  9. Jason says:

    Hey Steve! I have been kicking this one around in my head for a while. What exactly will my post-job/retirement look like? I have been taking steps to save in my 401k sure….but more importantly (and like you mentioned) I have been working on my current lifestyle choices NOW. I have drastically cut my monthly spending and moved to a cash only budget for all non-bills. I agree with you that yes a high-income or high savings rate helps, but it’s the choices we make NOW that will determine how our future looks.

    • Steve says:

      Thanks Jason, appreciate your thoughts! And good on you for taking the steps to better your financial life now, well before you plan to finally call it quits. It’ll make that process that much easier. 🙂

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  14. Paul Jackson says:

    Even though we’re both still working and it’s 2 years before we hit FIRE, we’re only allowing ourselves a monthly spending budget now that we know we’ll have in passive income when we retire. Our monthly spending budget has to cover everything, including fixed outgoings (insurance, taxes, utilities etc) food, work commuting costs, entertainment etc. The rest of our income is invested on the day we get paid.

    That way, when we retire, we’ll have been living on our ‘retirement’ budget (passive income) for two years already – the ‘flip-over’ should be seamless if we’ve got it right.

  15. ZJ Thorne says:

    So many people forget that what you spend in retirement matters a great deal. My current assumptions have me at equal spending to now, but allocated differently. Less in commuting and more in food.

    • Steve says:

      Thanks ZJ – yup, spending plays an incredibly important role in all of this. Yes, it’s nice to have a bunch of money. And yes, it’s also nice to earn a bunch of money. But, if you’re also *spending* a bunch of money, then all that income doesn’t matter too much!

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