- “Made It” in life is when you have enough “cash” and retirement income TODAY, that you don’t HAVE TO
- There are some simple steps you can take to measure if you have Made It.
- We’ll determine your net worth and future income
- We’ll match it to minimum required expenses
- We’ll account for the tax man
- We’ll look at how to improve your situation so that you too, Made It!
Everyone dreams (or worries) about the time in their life when they don’t have to work and can retire. You may want to work because you enjoy it or want to further build your nest egg, but you don’t have to work any longer. You might think that once I have a million dollars, you’ve Made It! Well, being a millionaire might not be enough anymore, depending on your age and future expenses. I have a future article coming where I’ll explain this.
Here are the simple steps that we’ll discuss, determine “liquid net worth”, determine basic expenses, look at future income, subtract taxes and finally see if you have Made It.
The first step is determining your net worth, sounds like you need an accounting degree, but you don’t. I’ll walk you through a few steps. The key here is to determine your “liquid” net worth, normally your net worth would include the value of your house, cars, furniture etc. These items are liquid, you can’t easily turn them into cash to live on, besides you need a house, a car etc. to live after you’ve Made It. Normally determining your true Net Worth you would add in the cash value of all assets, house cars etc and then subtract out all “liabilities” balance of your mortgage, credit card debt, all loans etc. In our example, we’ll just include the monthly payments for these liabilities in our living expense calculations.
Liquid net worth include your savings, stocks, bonds and mutual funds that you can actually cash in. You can include your 401K, IRA and Roth IRA accounts. Do not include life insurance or an annuity. Calculate your Liquid Net Worth including your spouse if you are married. Here is a template showing what it will look like. Start with last year, then project out both the current year. Notice that I projected a 13% increase in investments in 2017. This is highly unusual and I only use it because 2017 looks to be a hot year in the market. For planning purposes I would suggest a 4-5% yearly increase based on your type of investments.
|Combined Liquid Net Worth|
|Brokerage Account – Taxable||$300,000||$340,000|
|Total Liquid Assets||$680,000||$765,000|
Your Liquid Net Worth can now help us determine how much you can withdraw during retirement so that you won’t run out of money.
Now we’ll determine how much income you’ll have available to live on. The money you live on in retirement will come from both withdrawals and “retirement income”.
Let’s calculate withdrawals. The issue becomes how much can you safely withdraw from your Liquid Net Worth each year in addition to Social Security and pensions. There are a lot of excellent articles about this topic, including this one here. The range is usually 3-4%, a safe bet is a 3.5%, that’s what my wife and I use. It also happens to be pretty close to the Minimum Required Distribution (RMD) rate from Social Security.
So, let’s do the math based on our expected Liquid Net Worth for 2017 – $765,000
3% Withdrawal Rate – $22,950/year
3.5% Withdrawal Rate – $26,775/year
4% Withdrawal Rate – $30,600/year
Let’s examine Retirement Income. This includes Social Security and pensions. It is easy to determine your annual Social Security income, just go on-line and check it out. Beginning at age 62 you and/or your spouse can start receiving a reduced Social Security income. Waiting till your Full Retirement Age (FRA), usually 66 or 67, you can get your standard SS amount. However, if you wait until you are 70 you get a premium amount (an extra 8% per year from FRA until age 70). Financially waiting until 70 is a GREAT deal. In our SS calculations we’ll include one spouse at 100% and of course the other spouse is entitled to an additional 50% (there are lots of rules around all of this).
|Social Security – Spouse 1||$25,000|
|Social Security – Spouse 2||$12,500|
|Total Retirement Income||$44,500|
Let’s add these together, here is the total income available:
|3.5% Withdrawal Income||$26,775|
The next step is to determine your retirement living expenses. Many suggest that you just use 80% of your pre-retirement income as a short-cut calculation. I suggest that you take the time to calculate exactly what you will need, if you were a high income earner, you paid off your house and have no debt, you can probably live very comfortably on a lot less than 80% of your final income. In your annual expense calculations, include a line for “other”, for example the refrigerator dies, you need a new central air conditioner etc. You need a large emergency fund to handle these, also don’t under estimate the cost of healthcare.
For our example we’ll use Annual Expenses of $65,000.
So you might think that you have Made It, your expenses are less than your income. But, we haven’t included income taxes. We’ll calculate them now, if you are like me and moved to Florida to escape all state and local income taxes you just have to calculate federal taxes.
Federal Income Tax. Using the above income and the 2016 tax tables for Married Filing Jointly, age 65, using standard deductions here is what the Federal Taxes are.
Adjusted Gross Income: $47,021
Taxes Due: $ 2,834
Effective Tax: 6%
Note that of $35,000 in joint Social Security only $13,246 was taxable income.
So have you Made It?
|Less Federal Tax:||$2,834|
YES – MADE IT!
If you haven’t made it there are a lot of things you can do to make sure when you decide to retire that you have Made It. It’s actually simple, just generate more income or reduce your expenses. Most of these you control. Many other have Made It, you can too!