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 retirement......so 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
5-Pensions
6-Annuities

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.  ;-)

Sluggy