How much income will you need in retirement?
Here’s an eight-step plan for figuring that out.
1. Start with your current income. As an example, let’s assume you make $100,000 annually.
2. Assume some inflation. No one knows what inflation rates will be between now and your retirement. What we do know is that postage stamps cost 55 cents today. Twenty years ago they cost 34 cents. Thirty-three years ago they cost a quarter. Might be wise to assume many of your costs could double over a 30-year retirement.
3. Estimate your taxes. Many people will have a lower tax bill in retirement for three reasons.
First, the steepest tax most workers pay is their payroll tax. Currently, wage earners pay 7.65% of the first $142,800 of their income in payroll taxes. In our example above, that means $7,650 of taxes that would disappear in retirement.
Second, most retirees receive Social Security income, and only a portion of that income is taxable. Depending on how much income you receive from various sources, anywhere from zero to 85% of your Social Security income may be taxable.
Read that carefully. It doesn’t mean you’ll pay 85% of your Social Security income in taxes! It means that up to 85% of the income itself maybe counted for tax purposes. So if you got $1,000 of Social Security income and 85% of it qualified as taxable income, you would count $850 as taxable income (along with all your other income).
Finally, the fact that your overall income is lower would put you in a lower overall income tax situation.
4. Don’t count money you now save. You don’t live on the money you now save. You are saving that for the future. It isn’t part of the current lifestyle you are seeking to replace in the future.
5. Build in some “fudge factor.” Let’s be honest, this is art, not science. Will unexpected things come up in your retirement years? If you said “no,” you get an “F” in history. Stuff always comes up. And it will in the future. So let’s have a little extra income handy plus a little extra liquidity (i.e., readily available savings) beyond our calculated needs.
6. Remember Social Security. A person making $100,000 might expect about $30,000 per year in Social Security benefits, depending on when they begin receiving benefits. A spouse might receive anywhere from half to equal that amount. Let’s conservatively assume total household income in retirement from Social Security is $40,000 in this example.
7. Estimate an income stream. How much income can you expect from all the assets you’ve saved for retirement? If you want to live off bank interest rates, it won’t be much. And if you just withdraw what you feel you need month to month, you may run out of money. Besides, investment accounts are subject to market fluctuations, which can be fatal to a withdrawal plan.
As you can see, this is the tricky part of retirement planning. It’s where most people can benefit from the help of an experienced financial planner.
8. Put it all together. Back to our example of a household earning $100,000. From that number we can subtract payroll taxes ($7,650) and savings ($10,000). The house will be paid off, so that $1,000 a month mortgage payment is eliminated. That puts us down to $70,350.
To account for increases in the cost of living, we may need to bump up that $70,000 to $100,000. With the $40,000 our couple will be receiving from Social Security, that leaves $60,000 that needs to be produced in annual income from our retirement savings.
Could your retirement savings reliably produce $60,000 in retirement income each and every year?
If you don’t know, you probably should. And a great place to start is by reading my new e-book “How to Put Money Worries in Your Rear View Mirror – The Financial Freedom Roadmap.” It’s free to anyone requesting it. Just email me to request (bmoore@argentadvisors.com).
Argent Advisors, Inc. is an SEC-registered investment adviser. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request. Please See Important Disclosure Information here.
