100% Base Pay Replacement: What Does It Mean?
Generating a reliable source of income is one of the most important, and often challenging, parts of a successful retirement. Those of us fortunate enough to have a decent defined benefit pension have a leg up on this. Combine this with an inflation protected social security benefit, and some savings, and a retiree has a chance at a modest, yet comfortable retirement. I’ve seen this firsthand. My in-laws were a truck driver and a part-time registered nurse. They combined a teamster’s pension, a small nursing pension, and 2 social security benefits, along with a 403b plan, and lived a comfortable retirement.
One of HD’s most esteemed authors frequently advocates for a retirement income goal of 100% base pay replacement in retirement. This was repeated recently in this post. There have been lively discussions on this site about this in the past. I’ve wondered if one of the sources of disagreement in the past was the use of the term “base pay”, but I’ve never seen it discussed. Today’s post resurrected that thought, and I think it may be worth exploring. Here are a few questions that I have.
In my working career, most professional’s salary was the same as their base pay. At one point I managed more than 500 engineers and scientists, and had access to the payroll data for 1000s of employees. The vast majority worked for a salary, with occasional bonuses or awards. But they were small in comparison to the salary. In my experience, base pay and pay are the same thing. I’m aware of industries – finance, tech start-ups, sales – where pay is tied to business performance. In my companies that was limited to the executive level. What is the experience of others? RDQ has told us he worked for a large utility. Were bonuses a significant part of the compensation for the majority of employees?
How do you define base pay for a couple with both working? My wife was able to work part-time as a nurse while our children were growing, and transitioned to full-time as they finished high school and went to college. She progressed well in her career and her last 15 years she developed and managed multiple surgery centers. Her salary increased with her added responsibility, and helped us pay for college, purchase a beach home, and save significantly towards retirement. In the last decade of work, we were able to max out retirement account contributions and save beyond that. Should you replace the income amounts that were directed to qualified retirement savings accounts while working?
Consider the new retiree in the table below. She retired form her position on 12/31/2024. She has no pension, but saved diligently in her employer’s 401k, an after-tax savings account, and a Roth IRA. How should she set up her income plan starting Jan 1, 2025?
Item
Data
Facts
Personal
Female, single
DOB
Jan 15, 1960
Retire
Dec 31, 2024
Residence
PA
2024 Income
Salary
$100,000
401k Savings
$30,500
HSA Savings
$5,150
Payroll Tax
$7,650
Federal Tax
$5,669
State Tax
$3,000
Net Pay
$48,031
Assets
401k Balance
$1,200,000
After-tax Cash
$100,000
Roth IRA
$200,000
SS Benefits
Monthly Benefit
65 (1/15/25)
$2,115
67 (1/15/27)
$2,558
70 (1/15/30)
$3,038
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