Tax Planning

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Retirement Planning Part 3 – How Much Income will I Need/or Have in Retirement

In Part 2 we discussed some actionable items that can help you prepare for your retirement. In this post we’ll discuss how to determine how much money you’ll need or have in retirement.

Now that you are planning to retire and you understand there are no more “paychecks”, you need to determine how either how much money you’ll need in retirement. Of course we’ll also examine how much money you will actually have access to based upon your current savings, investments, pensions and Social Security.

How much will I need?

  1. First of all the common recommendation is that you will need about 80% of your pre-retirement income in order to retire without a major life style change. Therefore if you (your household) were making $100,000/yr. you should be able to live on $80,000/yr. in retirement. However, this may not meet your needs, for example if you currently make $100,000/yr. but carry significant debt or have other financial responsibilities you may need a lot more than 80%.
  2. The very best way to determine how much you’ll need is to develop a start from scratch, realistic expense budget. Be sure to include the cost of future healthcare insurance costs of buying cars, replacing appliances, vacations, etc. Also set aside a healthy emergency fund.
  3. You can now search on line for retirement planning calculators to help you determine how much money you’ll need to actually retire. I found that T. Rowe Price recommended 11x your retirement income, Fidelity 12x, and so forth. All of these have varying assumptions. Here is another examples:

BTN Research estimates that, assuming 5% average annual investment returns, for every $1,000 of monthly income you want over a 30-year retirement, you need $269,000 in the bank. Let’s consider that same household making $75,000 a year. To replace the commonly recommended 80% of income in retirement — or $60,000 in this case — the household would need $5,000 a month. In this calculation, this household’s number is $1.35 million, or 18 times final pay. A higher investment return would bring the numbers down.

 Dallas Salisbury, president of the Employee Benefit Research Institute offers: You need 33 times what you expect to spend in your first year of retirement—after subtracting Social Security benefits. Let’s take that same household, which spends every penny of its $60,000 income in retirement. Say this household collects $20,000 a year in Social Security. That leaves it spending $40,000 from other sources. So this household still needs a nest egg of $1.32 million, or just shy of 18 times final pay

 In summary, you need to use on-line tools to start building retirement plans that cover both your expenses and available income.

In our next post we’ll discuss how some investments will help you grow your portfolio to meet your retirement needs.

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2014 Year End Tax Planning for Retirees

If you are like me, you are either retired or close to it. One quick shock on the day you retire is that you no longer have that pay check you’ve been getting most of your adult life. If you’ve done a good job of planned your retirement in advanced you can be celebrating instead of worrying. While in retirement you can set new goals, one of might be to pay the smallest amount of federal income tax as possible. Is it possible to appear “poor on paper” yet live a comfortable lifestyle? Yes!

Here are some items for your consideration.

  1. Manage your 2014 tax bracket. For example, if you just started receiving Social Security this year, consider returning it and delaying payments till you are 70 ½. There is no penalty for doing this. Some of this will be taxable. This might give you a chance to live off savings (cash) while paying little if any tax.
  2. Contribute the maximum amount you can to an HSA account, this will provide a credit to your Taxable Income.
  3. If possible, maximize your deductible items such as medical expenses by getting those new eye glasses, dental cleaning and so forth this year instead of early next year. Consider prepaying your property taxes.
  4. One big issue can be stock market opportunities in your taxable account. With the recent volatility in the market consider selling stocks, ETF’s or fund’s with short-term losses. These losses can then offset gains. You can also carry forward a maximum of $3,000 into future years. Just make sure you watch out for a “Wash Sale” on stocks sold for a loss if you put this money back to work in the market. When you use a loss to offset a gain you also get the benefit of re-setting your “cost basis” for the stock. This will benefit you if you buy back and then sell this stock for a gain in the future.
  5. Also regarding your taxable brokerage account, try and maintain “qualified-dividend” stocks which get preferred tax treatment or no tax at all if you can find a way to stay in the 15% tax bracket. Keep in mind that if you are in the 10% or 15% tax bracket there is 0% tax on “qualified dividends” and Long Term Capital Gains.
  6. If you’ve done a good job being “poor on paper”, you can also convert some of your IRA into a Roth IRA. Just keep an eye of your plan so that you don’t jump into a higher tax bracket.
  7. If you hold Equity Mutual Funds watch for the December “Distribution Date”, consider selling before that date if a large capital gain is expected. Otherwise you will be surprised by paying tax on a distribution you don’t actually get (the fund price, in theory is lowered by the distribution amount).

In a future post I’ll provide a plan for postponing your Social Security and various options.