Do you know how much you need to save in order to retire with an income of $100,000 per year? By the end of this post, you’ll have a good idea on the answer to that question. Then you’ll be able to figure out how much you’ll need to save each year to get to that number, depending on your current age.
How Far Away is Retirement?
Before you can determine how much you’ll need to save in order to have $100,000 of income available to you each year during retirement, you first need to decide if you need that amount now. Is your retirement date this year or do you still have a few years to go? If you’re 62 and planning to retire this year, then, yes, for purposes of our illustration you’d need that amount now. But if you’re only 57 and have five years to go until retirement, you’ll actually need to plan for $116,000 in income each year. This is because of inflation. What $100,000 looks like this year, will actually only feel like $86,000 in spending money five years from now. My estimation is based on the general estimate of 3 percent inflation per year. It could be more or it could be less, but we’ll keep it at 3 percent for now.
Now, if you’re 52 years old and planning to retire 10 years from now at age 62, that $100,000 should really be $134,000 per year. So, the first question you need to answer is how many years out is retirement?
If you’re five years away, take the amount of income that you need to retire, for our purposes in this post we’re using $100,000, and multiply it by 1.03 five times. This gives you the grossed-up, inflation-adjusted number for how much income you’ll need each year during retirement.
What Other Income Will You Have in Retirement?
In order to know how much you’ll need to have saved before retiring, you’ll also need to consider what other income you will have available to you at that time. This includes sources such as Social Security, pensions, or annuities. For our example, we’ll assume you can draw from Social Security, however, you have no pension or other accounts. Social Security will be around $2,100 each month. Per year, that rounds to around $24,000 of expected income. The rest you will need to make up from your investments. For a 62-year-old who is retiring this year, instead of $100,000, you’ll need to pull $76,000.
Now that we know that number, we can determine how much you’ll actually need to have saved as a nest egg?
A Word of Caution
Before I jump into the numbers, I just want to prepare you. These are assumptions. Don’t make any decisions based on the numbers that we go over here. I hesitated in even sharing this post because when I reveal the number, there’s a good chance that you’re either going to feel great, if you have more than the total amount saved, or you’re going to be under the number, and it’ll get you down.
So, before we do any more calculations or reveal any numbers, I encourage you to play stoic in this situation. Whether you’re above or below the estimated amount, you came here to get some information. Plan to leave with at least one thing that you might try to improve, or one thing that you might be able to hone in on. Coming up with your specific number that you need to save is a great conclusion, but whether your number is above or below what you have, you can take action to prepare yourself even further.
And the last thing I’ll say about this before moving on is that these assumptions don’t factor in many important parts of your plan. If you have a relationship with a good advisor, or if you’re a DIY retirement planner, then you should already be doing a lot of things that are adding additional returns to you investment, which will increase the rate of your success. Much of it has to do with your income, withdrawal plans, taxes, and how you’re invested over the next few years.
Some other additions that could improve the impact of your plan, especially if you have many years left before retirement are:
tax-loss harvesting, and
asset location and allocation
So, How Much Do I Need to Save?
If we were to use the rule-of-thumb 4 percent rule of withdrawal (again, your needs might be different, but this is a good place to start for this example) for a 62-year-old who needs $76,000 each year, you would need to have $1.9 million saved as a nest egg. This assumes that you withdraw 4 percent from your savings each year, plus receive Social Security. Together those two funds add up to $100,000 each year.
Next, we’ll use this same 4 percent assumption for a 57-year-old who has five years to go until retirement. At 3 percent inflation, you’ll need $112,000. Considering the $24,000 from Social Security, the annual need is $88,000. To determine your nest egg, divide 88,000 by 0.04 to see you’ll need around $2.2 million saved.
There’s More To Your Plan Than Just This Number
Please remember that there’s a lot missing when you use general assumptions. As I already mentioned, withdrawal planning can really impact your taxes, for example. A good financial advisor will help you avoid some of the pitfalls of using rule-of-thumb numbers.
Also, this total nest egg number is not all there is to creating a retirement plan. There’s a lot missing when using these simplistic models and assumptions. These models don’t consider things like:
how to pay less in tax,
what you should be doing each year to improve investment returns, and
how you can be prepared for unexpected events without having too much of your assets in cash.
There are many moving pieces and a lot of things to think about when it comes to retirement planning.
Billy and Akaisha Kaderli are now 68 years old and they retired over 30 years ago at the age of 38, with a little over $500,000 in their investments. Since then, they’ve used their investments for income. They haven’t worked; they’ve been traveling around the world. Now their nest egg has grown to over a $1 million and it’s been keeping up with inflation. I found this story so fascinating that I wanted to share it with you. We can take some advice about what worked for these two and apply it to your retirement journey.
So how did Billy and Akaisha do it?
#1: Take Time to Plan
Billy and Akaisha took two years to plan their retirement. They didn’t just decide one day that they were going to sell everything and retire from their jobs. While they were still working, they took time to create a draft retirement plan. Then for the next two years, they tried to poke holes in it and find reasons why it wouldn’t work. They really stress-tested their retirement plan.
#2: Make Sure Expenses Are Accurate
According to Billy and Akaisha, the most important part of making their plan was to ensure that their expected expenses were accurate. When they first came up with the idea to retire early, they went back the previous two years to look at what their expenses were and then they closely tracked expenditures for the following two years, to make sure that they were in line with what they thought. And I agree that having a good understanding on what your needs and expenses are in retirement is key. Really, if you’ve got that incorrect, that it doesn’t matter how much you have saved. If the amount that you need each month is inaccurate, it can really throw off the success of a plan.
Taking the time now to track these numbers is a worthwhile investment. You could use mint.com or another tracking software. You can do it manually too, but just make sure that you’re paying attention. It is a time investment to do it, but it will be worth it. When you track expenses over a period of time, it becomes easy to categorize normal expenses. You’ll also be able to differentiate between needs and wants. From what I’ve seen, the people who track expenses have a higher chance of success in retirement and feel a lot more comfortable with their plan.
This story of Billy and Akaisha is inspiring and it’s good to apply what worked to them to your own journey. But, we also need to remember that this was 30 years ago and it’s not today. There are some big differences between what was going on then and what’s going on now. They retired right at the beginning of a wonderful bull market for the following nine years. And as we’ve seen from the sequence-of-returns risk, the year that you retire makes an impact on the success of your plan.
There are some ways to make sure that you protect yourself from retiring at the wrong time. For instance, many people retired right before the financial crisis in 2006 or ’07. Those who were successful in navigating the crisis were able to implement some of these strategies to be able to make it through that period and come out on top. And also, most importantly, feel confident and not stressed about needing to go back to work. They wanted to be retired. They had a plan for what retirement was and thankfully they were able to do that.
All in all, this is a great story and I encourage you to watch the clip, get inspired, and take away pieces of advice that you can apply to your own plan. But remember, you’ve got to back it up with practical and wise financial advice and retirement planning advice to make sure that you’re on the right path for your own retirement, not somebody else’s. So, if you need help planning your retirement, please reach out to me.
When it comes to Social Security, there are two things that often catch people by surprise and can make an impact on how much benefit you receive. In this post, I’m going to give you some advance notice so you don’t get caught unaware and instead can maximize your withdrawals.
Surprise #1: Paying Tax on Social Security
Most states don’t tax your Social Security, but 13 actually do. And, when it comes to the federal taxes, you’ll most likely be expected to pay on 85 percent of the Social Security benefit that you receive. So if you receive $10,000 in social security, $8,500 could be counted as income and taxed at your ordinary income tax rate. If you have more than $44,000 of taxable income, you’ll most likely be paying that 85 percent number. If you’re single, then $34,000 of taxable income is the magic number. These estimates are based on the 2020 numbers.
Where people get caught off guard is in assuming that they won’t get taxed. If you have an IRA or 401k and you plan to use that in retirement, those withdrawals are going to be counted towards your taxable income. This increases the chance you will have to pay tax on your Social Security. As you plan out your cashflow and income plan, make sure that you’re taking into account these tax-planning expenses.
Surprise #2: Not Thinking Ahead About The Best Age To Take Your Benefit
The common thought is to start Social Security as soon as you stop working. If you don’t have a wage coming in anymore, it sounds logical to start taking Social Security. But that might not be the best thing to do. You can start as early as 62 or as late as 70, and your Full Retirement Age (FRA) is likely 66 or 67. If you start collecting before your FRA, you could be reducing your total benefits by up to 30 percent. If you do this, there’s even a chance that the government might withhold some of your Social Security income. And I’ll explain why, but first, here are the details for those born in 1960 or later, who therefore have a FRA of 67.
As you can see in the following chart, if you start collecting Social Security early, your benefits are reduced. If you wait until you reach your FRA, the benefits are unchanged. If you delay and don’t take it at 67, the benefits go up another 8 percent each year that you wait until you have to start taking it at age 70.
Age You Start Collecting Social Security
Change In Benefits
Something Else To Watch Out For
Another risk of starting Social Security before your FRA is getting some of your benefits withheld by the government because you earned a wage while taking Social Security. Based on the 2021 numbers, if you make more than $18,960, every dollar above that amount could count against you. In other words, if you make over $18,960, $1 for every $2 you earn could be withheld.
For example, if you’re 64 years old and make $29,000 in wages, and you’ve already started your social security, that’s $10,000 over the limit. So, your Social Security could be reduced by $5,000 that year. I also made another video on this topic with some of the specifics and if you’re interested in learning more, click here. But because of this, we sometimes recommend waiting until at least your FRA to begin withdrawing Social Security. And we might even look at other income sources such as your IRA or 401k before starting Social Security.
But, it depends, so be sure and talk to your personal advisor to see what’s best in your situation. I recommend modeling out scenarios of either delaying Social Security and using your IRA, or delaying your IRAs and starting Social Security. See which one makes more sense for you. At 72, you have to take out of your IRAs and 401ks. Your taxes at that age will most likely be higher the longer you delay withdrawing from your IRA or other tax deferred accounts.
But, again, talk to your advisor about the withdrawal strategies. If your advisor doesn’t talk about the things like modeling out these income plans or taxes in retirement, and they only focus on investments, then give me a call. I’d be happy to talk about it with you, or click here to access my DIY Retirement Plan.
Warren Buffett once said, “never ask a barber if you need a haircut.” But honestly, here at Streamline Financial we’re not salesy, and we’re not desperate to work with new clients. And actually, we don’t work with anyone where the value that we provide isn’t more than the cost of working together. So, if you’re on the fence, in this post I’m going to share a few reasons why you might want to work with a financial advisor.
Reason #1: A Mistake Now Can Mean Losing A Lot
When you’ve been saving and reach a certain level of assets, you realize that a mistake could mean a big loss. A mistake now is one that you don’t want to try to afford. It’s important to be aware that every financial decision is made up of part finances and part emotions. And, as you get closer to your retirement date, the emotional side of these decisions gets stronger. I have talked to people who decided to move a big portion of their savings and investments into cash because they felt like it was the right thing to do. Ten years prior, they wouldn’t have made that decision. But now, because they’re getting so close to retirement where they’ll have to start using the money, they want to make it more secure, or they feel like it might be more secure in cash.
But there are better ways to make your nest egg secure and your income secure. And it’s not by buying insurance or annuity products. By making the decision to convert assets into cash, they don’t realize that cash could actually be the worst investment. When you factor in inflation and things getting more expensive, a $1 million in cash now could be worth $250,000 less in just 10 years. So, finding a good financial advisor can help you lessen the chances of making the wrong financial decision or possibly relying too much on the emotional side of things.
Reason #2: Avoiding Analysis Paralysis
Maybe you’re not exactly certain how to prepare for the four economic seasons that we could face over the next 10 years. You’re searching for answers by reading articles, or watching YouTube videos, or asking friends and family. Then you realize there are so many opinions out there, and many of them offer conflicting advice. When you realize this, you reach a point of analysis paralysis. We have seen it in a lot of people and it usually stops them from making the next step or taking the necessary changes to improve their financial life. Working with an advisor can help you break through the paralysis to effective action.
Reason #3: You Don’t Enjoy Finances and Investments
And the opposite can be true as well. Maybe you don’t enjoy learning about finances and investments. You don’t want to spend your free time learning, reading, studying, and making decisions by yourself, and then worrying you made the right choice. Rather, you want to live a life that you are enjoying; full of the things that you find exciting, fun, and fulfilling. You don’t have to worry about the money piece of life as much. Of course, you’re still aware, and your confident in your plan, but you’re not in the day-to-day management. Becoming an expert in the financial world is not on your bucket list. You want to do the things that you do best, and you can hire for the rest.
Sometimes we imagine it like you’re going on a brand-new mountain trail hike called The Retirement Trail. You can take the journey solo, or you can hire a guide who has traveled this trail hundreds of times with others who are just like you. Then, when you get to a river blocking the trail, the guide knows exactly what stones to step on that aren’t wobbly and aren’t slippery so that you can get across safely. And when you get to the rock wall, the guide has tools in his backpack to make the climb much safer and easier for you.
If You Decide to Work With an Advisor
If you end up interviewing advisors, they should be able to clearly communicate the value that they offer to clients. At the end of the first meeting with potential clients, we usually have a good idea on whether the value that we provide is going to outweigh the cost of working together. Because of this, there’s no question on whether it’s worth it or not.
If you are interested in working with me, click here to set up an introductory call. And if you think working with an advisor isn’t for you, check out my DIY retirement plan to help you navigate the next steps.
Here at Streamline, we usually model out different retirement withdrawal strategies or outcomes that could play out for our clients. Right now, we’re looking at historically low tax rates in our country and as you look at history, it seems to move in a cyclical fashion. Additionally, in my opinion, there are some other reasons why taxes could be going up in the future. But since I don’t have a crystal ball, we model scenarios for our clients and we choose the one where they pay the least amount of taxes over their lifetime. In the video above, I’ll show you a visual representation of some of the options that you might have when tax planning, or plotting out your ideal retirement withdrawal strategy.
As we get into this example, here are a few assumptions about the fake client I created for this scenario:
He is 55 and married.
The client is stopping work this year, at age 55.
He and his wife need to live off their savings until Social Security kicks in.
Their mortgage is paid off and they need $4,500 a month for expenses. We assume this cost-of-living amount will increase by 3 percent each year.
They have three types of accounts: $1 million in their 401k, $100,000 in a Roth IRA, and $400,000 in a non-retirement brokerage account.
Given those basic assumptions, what’s an ideal withdrawal strategy for them? Conventional wisdom recommends not withdrawing from your traditional IRAs, 401ks, or other pre-tax money, until you’re forced to at age 70, or until you have to pay for income that allows tax deferred growth to compound. Now this is not always the best plan if you want to pay the least amount of taxes. This is why we model different scenarios.
Regarding our fake client heading into retirement, consider two different scenarios, one which is estimated to save over $400,000 over the clients’ lifetime.
Comparing the Two Scenarios
Our first scenario is based on conventional wisdom. Our client will start Social Security early at age 63, and is also withdrawing from his taxable account. This plan looks pretty good until the client reaches 72, and then we start to see a decline. Part of the reason this is happening is because of the increasing expenses. In this plan, they don’t really pay a lot of tax until Social Security kicks in. However, at that point there is a drastic increase in how much tax they will have to pay as they get older and their Required Minimum Distributions get larger.
Compare this to our second scenario where the client is initially withdrawing from his IRA only. He is even taking out more than his monthly expenses require and converting the excess to a Roth IRA. In this plan, the client pays more in taxes until age 72 where all of a sudden, the tax is actually close to zero. At this point in life, he might be traveling less and it’s important to have fixed expenses so paying little-to-no tax is ideal here. To avoid paying a lot of tax on withdrawals, take money early from accounts that have Required Minimum Distributions.
To see a cash-flow summary of the two plans, be sure to watch the video linked above in this post. While these are made-up scenarios, it really illustrates the difference that a retirement plan, tax plan, and withdrawal plan can have on the success of a long-term financial plan. So, the big question is, why would you leave it to the government to decide how much you’re going to pay in tax? Especially when their policy changes really impact your retirement in a big way. Whatever the government decides in the future is an unknown variable. We don’t know what tax rates are going to be in the future and when you’re planning your retirement. So why not have a little bit more control over some of the variables?
This video isn’t specific advice for you. I can only give advice to the people who work with us at Streamline because we know their specific situation. So please don’t make any important decisions just based on this post. It’s important that you talk with your advisor before making any big decisions. The purpose of this post is to give you an idea of some of the things you should be thinking about when you’re retirement planning and considering withdrawal strategies, with the hope that you can go to your advisor with this knowledge and then make your retirement plan and your retirement life better.
If you’re looking for an advisor who focuses on retirement planning, feel free to reach out to me. At Streamline, we think about more than just the investments.
The Biden administration is proposing changes and, in this post, we’ll look at what they might mean for your retirement. The first one is only going to impact people who have assets totaling over a million dollars. But the second proposal, in my opinion, is going to impact everyone. It’s going to affect how much tax you pay when you withdraw from your IRA and 401k.
How Much Tax Will You Pay On Your Estate?
The first proposed change has to do with how much tax you could pay on your estate. When you pass away, there’s really only three places that you can leave your money:
Most of the people that I talk to prefer to leave more money to the first two than to the last one. I’m sure you feel the same way. And as I said before, this will impact those who have more than a million in assets when they pass away, because the Estate Tax Exemption Limit that I’m hearing mentioned by the Biden Administration could be changed from the current limit of around $11 million, down to just $3.5 million. If you think you’ll never have that amount of money, remember that if you’re in your fifties or sixties, with $1 million at 7 percent growth rate for the next 20 years, that gets close to about $4 million. And that does not include your house value or other real estate, or any of the other assets you have. The estate tax calculation includes all of these things.
So, what does that $3.5 million exemption mean?
If this proposed change is approved, and you are an individual with an estate over $3.5 million, anything over that amount could be taxed by the federal government. For example, if you pass away with $4.5 million in assets, the million dollars that’s over the exemption amount could be taxed at 40 percent or $400,000 extra going to the government. Note that this does not even include what your state’s estate tax might be. That’s a whole different calculation. But just from this example, you can see that it could mean some big, big dollars.
There are ways to get around taxation, but, first, if you’re serious about estate planning, don’t take this video as advice. I am not an estate planning attorney. I just help people and have talked with some estate planning attorneys around this area. So, if you’re interested, I recommend finding one and discussing these strategies with that individual. But here are a few quick ideas to have in your back pocket when you do talk with an attorney. The first one has to do with paying less to the government by getting more to charity. And then the second one has to do with paying less to the government, by getting more to your heirs. And as you can tell, the main goal here is giving less to the government, if you can.
Giving More to Charity
When you give money to charity, it’s not included in your estate. Many people will designate charities as one of the beneficiaries on their accounts. When you do this, money going to a charity should be excluded from your estate tax calculation when you die. Another option is to set up a donor-advised fund as a beneficiary. This account can be set up to grant out certain dollar amounts or percentages of that donor-advised fund value even after you pass away. It’s a nice way to continue to support smaller organizations that you care about who might not be able to handle a big lump sum payment all at once.
Giving More to Heirs
While you’re alive, you can manage where your money goes. And, you can see the benefit and the blessings that you can give to the charities. You can see first-hand the impact that your donation makes on those charities. When you give to your family members, or friends, you can see the blessing and the impact of that gift. Why not have two parties enjoy that––the receiver, and then also you, the giver. We know that when you do give, you actually feel better if you can see a change happening.
I have clients who are actors and they’ve done pretty well for themselves. Some of them have a lot of friends who are struggling actors. And this past year has been so difficult for a lot of actors because of no work. So my clients have been secretly helping those who really struggled this past year. And it’s been giving my clients a lot of joy to see the impact that they’re making on other people.
How Much Tax Will You Pay on Your Pre-Tax Accounts?
This proposed change from the Biden administration has to do with the amount that you might have to pay on the withdrawals from your 401ks IRAs, and any pre-tax accounts that you have in your retirement plan. In my opinion, you don’t have to be a millionaire for this to impact you. It just might sting a big more if you do have over a million saved. One traditional withdrawal strategy says: defer your IRA and 401k withdrawals as long as you can, because it’s all tax-deferred growth. And I could see the reasoning of why you’d want to defer that.
But when we model out these specific withdrawal strategies and tax plans for our clients, we find that waiting to take money from pre-tax accounts could be causing them to pay more tax than necessary over their lifetime. Often by waiting to take pre-tax money until they get to the Required Minimum Distribution age*, they’re moved to a higher tax bracket. This means that they’re paying more tax than what they were expecting in their seventies. The way around this is to design a retirement income plan. At Streamline, we run a retirement income system that gets the investment plan, income plan, and tax plan all working together. We’ve seen that it often makes sense to withdraw more money from pre-tax accounts first and then pay the tax now versus waiting to pay it later.
But again, don’t take that advice and just implement it based on this post because I don’t know your specific situation. Sit down with someone and model out your specific scenarios to see which one allows you to pay the least amount of tax.
What About Biden’s Tax Changes Right Now?
The Administration has proposed raising rates tax rates on people with incomes of around more than $400,000. But the question we’re asking is: do we really think that tax brackets are going to be the same five or 10 years from now? Now I don’t have a crystal ball, but I do know that we’re at historically low tax rates right now. And when we look at history, it moves in cyclical nature. I don’t want to make any big assumptions; that’s why we model out a bunch of different scenarios, whether its tax rates going up, saying the same, or going down. To see a visual example of what we do for our clients, click here to see a video illustrating several different scenarios.
* The Requirement Minimum Distribution age right now is 70 years old. At this age, you are required to withdraw from your pre-tax monies.