Probably one of the most important questions I get, or some variation, is how much income do I need at retirement and how much savings will I need to support that amount? You will hear a common rule of thumb of 70% of your current income. As with all rules of thumb, some are good and some are bad and frankly this one is nearly useless. The number will vary greatly. Some people may actually need 100% of their current income so let me wade through the weeds on this one and see if I can shed some light.

First, we pay taxes and sometimes a lot if you are in a higher bracket. You need to consider all kinds of taxes not just federal like state income tax, social security, and medicare tax. In most situations you should be in a lower tax bracket. If you are currently in the 28% or 33% bracket now you might be able to keep in the 15% bracket and here’s how. If spending from a taxable account, you’ll only have to pay capital gains and/or dividend rates (currently 15%) and even that you only pay on earnings. If spending from a ROTH account, no taxes will be owed at all. Even if spending from a 401(k) or traditional IRA, you still won’t pay taxes on the first $20,800 you withdraw if you are married filing jointly because of the standard deduction and personal exemption for you and you’re spouse. The next $9,325 is taxed at 10% and the next $28,250 is taxed at 15%. So your first $58000 is only taxed at 8.9%. Now imagine pulling $58,000 from say your IRA, another $20,000 from your ROTH IRA, and $15,000 from a taxable account (with a basis of $7.5k). Your effective rate would be 7.8% on an income of $93000 not bad.

Second, you don’t have to save for retirement when you are retired and most people have been in their peak earning years and contributing more to catch up. If you are putting away the 20% I recommend then that’s 20% you no longer need to generate during retirement.

Third, once you have enough money to retire, you get to ditch all that extra life insurance you no longer need as well as disability and possibly other similar type expenses.

Fourth, I hope you have your home paid off before retiring as I always recommend. That can be as much as 15-20% or more of your current income.

Fifth, once you retire you should no longer be supporting children and won’t need as much money for entertainment and other job related expenses. You’ll spend less commuting to work, clothes and maybe not need as nice of or as many cars. Heck, you may choose to downsize homes as I did and save a bundle on taxes, maintenance, utilities, insurance and a host of other expenses.

Sixth, social security isn’t going anywhere regardless of what you hear in the media. It may change but no way will it ever be eliminated. Many of you will be eligible for a benefit around $24-30,000 dollars annually. That’s not insignificant. Even with the previous income mentioned a maximum of 85% of that benefit is taxable. You may have to wait until 70 so be prepared to use other monies if you wish to retire earlier.

Seventh, many folks give large amounts to charity as a percentage of their income, a tithe if you will. A tithe on half your income is only half as much.

Yes, keep in mind some costs are probably going to go up like say health care. Maybe even travel more. But overall, there is likely to be a huge reduction in your required income when you retirement compared to today. So let’s look at the math.

Let’s say your current income is $90,000.

Subtract out 20% for taxes and you’re down to $72,000.

Subtract out 5% for insurance and other miscellaneous and 15% for your mortgage. You’re down to $54,000.

Subtract out another 1% for job related expenses, 2% for reduced charity and 1% for reduced housing expenses. You’re down to $50,400.

Add back another 5% for added health care costs. This moves you up to $54,900.

Subtract out $24,000 for social security and that leaves us at $30,900, or 34.3% of your current income.

This is good news in personal finance. Your expenses are likely to go way down in retirement if you plan early and get prepared now.

So the next question is how much do I need to have saved to draw $30,900 before retirement? Using the 4% rule many of you have heard me talk about the $30,900 previously calculated, adjusted for inflation, can be provided from a nest egg pf $750,000. So how long would it take you to accumulate $750,000 saving 20% annually? If you started at zero it would take you 21 years. If you have a head start you cut the 21 years down significantly. This is why it is so important to get started now rather than wait until later.

Save money consistently, invest wisely, and a comfortable retirement is well within you’re reach. Call me and let me help you develop you’re unique plan tailored to you.