Do you want to retire with enough money to maintain your lifestyle? Read on!
Toes up is not an acceptable plan, regardless of your job, lifestyle and age. Yes, you too, millennials and Gen Zers.
It starts with estate planning. Make sure that you have a properly executed will. See an attorney to do it right. If you die without a will (intestate), too much is left to debate no matter the size of your estate. Also consider organ donations, DNR (do not resuscitate) and any other relevant documents.
Now onto the actual financial planning.
When you retire, do you have any idea of what your (passive) income might need to be to support your lifestyle? Just relying on social security, although somewhat meaningful, more than likely will not support 100% of the retirement you plan to live. Financial planners estimate that social security should provide 40% of your retirement income.
Healthcare is also part of the financial consideration. Just looking at today’s costs, it will be much higher when you retire. Medicare in its current form only does so much, and it costs hundreds of dollars today. If your employer is presently paying for it, add that cost to your income needs.
What are your sources of income?
- 1. After-tax investment holdings. This includes all of your assets less your liabilities - cash accounts, stocks, bonds, real estate, etc.
- 2. Retirement accounts. This includes IRAs, employer 401ks and any other plan you might have.
- 3. Social security. Based on your reported annual earnings you will be entitled to some monthly payment.
The devil, as they say, is in the details.
Let’s assume that you have a current pre-tax income of $60,000, and you think that is what you will need to live on in retirement. (After inflation for 30 years, $60,000 will not meet your needs, but I use it for example only.) Using a rate of return of 5% and an estimated life expectancy of 85, you will need a total “portfolio” of $750,000. You do not have a portfolio for social security, but we can reduce your income requirement by the amount that you get from social security. Or looking at it a different way, your monthly income from social security equates to a present value for the portfolio calculation.
What are your assets less your liabilities? That is the after-tax investment holdings value of your net worth. Let’s assume it is currently $300,000. That will generate $15,000 in monthly income at a 5% return without invading the principal.
Are you participating in an employer-sponsored retirement plan, such as a 401k? If you start early, you can build up a very nice retirement package. You need to review with your employer, and they're quite possibly is a matching contribution. If you do not have that benefit, have you been contributing to your own IRA? Very easy to do and a significant part of your retirement planning. There are many plans which should be available to you.
For example, if you contribute $3,000 per year (and it does not cost you that much out of pocket as it is pre-tax dollars, maybe $5.00 per day or one Starbucks coffee), and started at age 30, your account would be worth $300,000 at age 67 assuming a return of 5%. That contribution is tax deductible today, so the net “loss” of available cash is less than $3,000 per year.
I can’t impress upon you enough the concept of this aspect of your retirement planning. You cannot rely on your children or the government to cover your lifestyle. THE TIME TO START IS NOW.
Now onto the social security calculation.
When it starts is a function of your year of birth and when you elect to start accepting payments. The rules are quite detailed, particularly if you incorporate your spouse into the planning. You should attend seminars, do your own research, or hire a consultant.
You receive an annual statement of benefits from social security. Watch it carefully as it is a portion of your retirement income. For reference, if the monthly payment is $2,500, that is 50% of your earlier retirement goal. If a financial advisor tells you that you need $750,000 in total holdings to meet your $60,000 goal, this social security amounts to $375,000 of that total.
Should you start at the earliest possible date for social security, or hold off until the last possible date. If you are healthy and blessed with good genes, it makes sense to wait. But again, review it carefully.
Will there be non Social Security money left over for your estate and beneficiaries? That depends on a lot of variables, most importantly how long your retirement survives.
Provided your estate is under $11,400,000, there is no Federal Estate Tax under current tax laws (which is sure to change in 2021). To the extent that some of your assets are worth more than your actual cost, there will be an income tax assessed to your estate, which effectively reduces your estate holding. But what is remaining will go to your beneficiaries. Plan properly.
WHAT ARE YOU WAITING FOR?
A 1975 graduate of the Wharton School at the University of Pennsylvania, Harvey enjoyed a 20+ year career in commercial banking, exercising his “golden parachute” in 1996. In his volunteer life, he is a past chair of the Small Business Banking Unit of the American Bankers Association, Easter Seal Society of New Jersey, the SAAGNY Foundation, PPAF EXPO, and Supplier Committee of PPAI. He is also a past President of PPAF. PPAI awarded him the H. Ted Olson Humanitarian Award in 2013.