Wednesday, April 15, 2015

How Ready Are You For Retirement? Cheer Up, It's Not So Bleak!

Alex left a comment on the blog on my Random Money post about how your "income" will change in retirement......
"We try to put away up to 25% of our pay into retirement or other forms of saving. One thing I try to keep in mind is that we won't have to replace as much of or pre-retirement income because of what we have taken out now for the 401(k) and health insurance....."

Let's talk a bit about this idea.

All the retirement gurus say you need anywhere from 75% to 100% of your current income, while working, coming in each year in retirement to live the sort of life commensurate with the life you lived while working.

This is hogwash!

Let's talk rationally a little about the difference between your working years and your retirement years.

First off, when you retire, you won't need to be taking cash off the top of your income to save it for retirement.
We have arrived at THAT destination!
No more saving for tomorrow because tomorrow is here.
Of course it's nice if you don't need to spend all your income each month in retirement and you can put some back for another time, an emergency and/or something special you want to do.

Whatever percentage of money you save each month from your salary, you won't need to do that anymore.
If you make $80K a year and put 25%(or $20K) a year into retirement savings, you won't need to do that action in if you think you need income of $80K a year in retirement, you actually only "need" $60K to live your $80K a year "working life".

Get it?

Second, let's look at the long list of taxes you pay each pay period.  Once you retire and don't earn a paycheck, most of the taxes you pay while working go away.

* Federal Withholding  You get no paycheck, there is nothing to withhold anymore.

* Federal Medicare/Employee-Employer(also known as FED ME/EE)  This what you and your employer pay into to fund Medicare.  At age 65 you will begin to collect on this and once you stop getting a paycheck you don't pay into this anymore.

*  Federal Social Security(also known as FED OASDI/EE) This is what you and your employer paid into to fund Social Security.  You can begin to collect this anywhere between age 62 and 70.  If you collect it earlier you get less(but more payments over time), collect it late you get higher payments(but fewer payouts over time).  "Full" retirement varies as to when you were born and they keep ratcheting up the "Full" retirement age.  It use to be 65 but if you were born after 1937 it goes up incrementally each year.  Mine is 66 years and 10 months.  Anyone born 1960 or later it's 67 years for full retirement.

* State Unemployment Insurance(also know as Unempl EE)  This what you and your employer paid into your State government to pay you a benefit if you ever were unemployed/laid off through no fault of your own(not fired for cause).  You aren't employed any longer so you don't pay into this.

*  State Withholding  and other State or Local Taxes(aka LS Tax)  No job, nothing gets paid into for these.

A few years ago Hubs paid $34,066.35 of our income into these tax categories.  If we want to live on the income level he made that year, that is $34K we don't have to replace of his income to do so in retirement.

Of course your retirement income, depending on what state you live in and what the income source is WILL be taxed in some way so you WILL still need to pay some taxes.  The Withholdings state and federal, Paying into SS/Medicare/Etc. go away but are replaced by new taxes on your income/savings.

The 6 main sources of income in retirement are....
1-tax deferred accounts
2-taxable accounts
3-Roth IRAs
4-Social Security

You will still be taxed on your income in retirement but depending on which mix of sources you have(as well as how much you get each month)will determine what you pay out.
You can do some research now while still working to see which sources will be the most advantageous to have for your situation.  Pay careful attention to those "taxable accounts" as there are many types and the rates can be high depending.

So to sum this point up, taxes in retirement will NOT go away, they will just change and you will probably pay less than when you were working if you play the game right.

Thirdly, voluntary Deductions will no longer come out of your paycheck when you have no paycheck. 

There are Before-Tax and After-Tax types of deductions you have withheld from your pay at your discretion.

These costs include--
Money put into retirement accounts through work
Medical, Dental and/or Vision plan payments
(All these are usually of the "Before-Tax" variety of deduction.)
Various Insurances(life, long term care)
Charitable Contributions
(All these are usually of the "After-Tax" variety of deduction.)

Once you retire, depending on your situation and if you are eligible to collect Social Security and/or Medicare, these may go away or be less than when you were working. (Except generally speaking, Long Term Care and Life Insurance will rise as you get older and continue to hold those policies.)

Of course as we talked about in point one, the contributing to a retirement account will go away.

If you give cash to charities, you may feel like changing that out with contributing your time to charity instead once you no longer work and have more time.  This will still give you the satisfaction of contributing to worthy causes but holding on to that little bit extra cash you use to donate each year.  Trade your time in retirement for charitable causes rather than your money to conserve your cash.

Add in that expenses related to working go down or go away......things like gas and tolls for commuting, maybe expenses related to a second car if you can do with just one vehicle in retirement, clothing & clothing care costs if you need a "business uniform", any supplies or classes or whatever you had to spend out of pocket for to keep your job(that includes meals out too).

And if you have/had kids and they are grown and on their own once you retire, you will no longer be paying childcare costs, school costs, paying to feed/house/clothe/entertain them either.

And hopefully by the time retirement comes you will no longer have a mortgage payment or a car payment to make each month.  That should be a top priority for everyone--to have no debt and everything taking a big chunk of your income today, paid for.

So cheer up!
To live the lifestyle you do now while working, you do NOT need to replace anywhere near your entire paycheck while in retirement.

Thumb your nose at all those "The Sky is Falling!" Retirement Experts....unless of course, you haven't done a thing yet to prepare for YOUR retirement.  ;-)




  1. It is kind of nice to see that all of those deductions are going to be gone! Thanks for making me feel better.

  2. Wow, I had never heard anyone say that you need 75 - 100% of your current income for retirement, but in any case you're right, it is hogwash. I was looking at my own figures for retirement at 65 (I am currently 56) and I thought, hey I won't have all the expenses I have now so 62 is do-able. Then hey, looking a little closer, so too is 60 and so on. So while I am not desperate to retire I know that I will have the option to do so comfortably (not lavishly) sooner than I thought. Nice to know. anna

    1. thanks for dropping by and commenting Anna. The talking heads and financial folks(mostly those who work on commission and have something to gain from getting you to invest with them)have everyone in a panic that they need at LEAST 1Million$s to retire comfortably.
      Stop the Madness I say.....

  3. Since I turned 62, I pay no property taxes. It is Homestead Exemption here in AL. I do have to sign up every year, be over 62 and live on the property for which tax is exempt. Do you have it in your state?

    1. Not in PA.....there is a Homestead Exemption//Rebate if your PA home is your primary home, which gives any one of any age a small deduction on your real estate taxes. It's hardly worth it.
      Where my daughter lives in Louisiana the state doesn't tax the first $75K worth of value of your home(at any age), which seems a bit of a better if your home is worth less than $75K, no RE taxes.

  4. Thanks for an excellent article, Sluggy! Personally, I think I live a way better lifestyle now in retirement than I did back when I was working and the kids were in tow. BIG weights off my shoulder.
    Who'd a thunk?

    1. The alleviation of STRESS when you no longer work and/or have kids to take care of is the single biggest GOOD THING about retirement. So you have less money than when you worked? Give me a better home atmosphere in retirement any day. Lack of stress also helps with your health. I can manage not having lots of cash for that! ;-)

  5. You Rock! A great post and info!

    1. Just trying to remind all of us "soon to retire" folks that the sky really isn't falling. lol

  6. I am meeting with my CFP next week to go over ALL OF THIS! Thanks for talking points!!! Awesome post!

    Peace <3

    1. I hope things go well with your CFP Jay!

  7. Spot on. We are trying to bulk up the retirement but it is still a long ways off. My plan is really to try and get our nut so small that SS pays most/all our monthly expenses.

    1. Getting the nut as small as possible(w/out suffering for it)and saving as much as you can are essential.
      You've still got YEARS to go(don't tell Den that!lolz)so you are on track.

  8. I wrote about this article today Sluggy, on my blog. You are inspirational! Thanks.

    1. Thanks for the mention Cindi! We soldier forward.....

  9. I asked the retirement experts I know (my parents!) how much they need each month. The number was staggeringly LOW. So.....I conclude that hubby and I ARE retiring at age 62...taking social security, selling our expensive No. VA home, and moving to Sarasota, FL where homes are 1/2 the price and winters are incredible. The investment companies believe we should have 3.5 million to retire, and I say HOGWASH too! :)

    1. We'll be neighbors! At last! I love your retirement plan. :)

  10. When we "ran the numbers" after the first year of retirement (56&63) we were shocked at how little it took to maintain our lifestyle! Still, we are looking forward to having extra cash to do some bigger trips once SS begins. Three million? I guess if you haven't lived until you retire you would need that much. For us, our nest egg is much smaller and we will be fine!

  11. The reality is that the biggest driver of what you need in retirement is driven by where you start your retirement. No debt, own home, savings, good health AND good health insurance (not just Medicare. No kids/parents you have to help (or you have savings to cover as much as you plan to help). Then you are likely in good shape with assets/income that don't replace 75 to 100% of your income. Change any of those variables - and you need more - likely lots more.Co-sgned your kids student loans? Car payments? Mortgage? CC Debt? little savings - all of those things change the equation. The reality is the people needing the most when they retire (because they have these expenses) usually have the least saved or the least ability to save - for a variety of reasons - not all of them self indulgent. I think people should consider how long they will live - when you talk about retiring at 60 - be prepared to cover 30 years of expenses (newest actuarial tables - which lag reality say late 80s for men and women now). Houses need work, cars need replacing, you may need help to stay at home or require a level of care needing assisted living etc. I will spare you all and not talk about what happens if the pension you are counting (not SS) disappears or reduces. Or the assets. Or many other things. If you are depriving yourself a lot now to save tons and tons - you might be able to ease back (every situation is unique!). But the reality is the older you get the fewer eating opportunities you have to make up any losses and having "too much" isn't the worst. That $1M is supposed to last you a very very very long time. *I don't sell/advise on asset purchases or retirement savings - but I am a pension expert and know far too much about the state of retirement savings/safety net in this country


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