Are you someone who feels like retirement is never going to be possible? Does it keep you up at night worrying that you are going to have to work forever? If this is you then please read the rest of this!
In 2019, the average retirement savings of American households was $255,000 (source: Board of Governors of the Federal Reserve System 2020). 74% of Americans say they plan to keep working in retirement. Choosing when to retire and having a well-designed financial plan is an overwhelming decision and amount of work. Many families are living with crippling fear and stress because of their retirement situation Let’s talk about how we can ease your retirement worries!
Now, let's be clear about something: retirement planning is a decent amount of work. There are many decisions that need to be made. These might include when to take social security, what parts of Medicare to take, where to withdraw money from investments, the asset allocation of your investments, income taxes, etc. The unfortunate reality of America is that many families don't have a well-designed financial plan that address all these items. Like most things, procrastination yields a less than desired result. BUT. Here’s the good news, it's not as difficult as it seems. And spoiler alert: we can help you build a plan that gives you confidence for your future.
Still not feeling the confidence starting to erupt inside you?! Let me tell you a story about how we helped a couple go from feeling like they had to work forever, to feeling confident in retiring on their own terms!
Background:
- Husband (62) and Wife (60)
- Husband Income: $60k/yr
- Wife Income: $40k/yr
- Husband has roughly $100,000 in retirement savings
- Wife has roughly $25,000 in retirement savings
- Monthly budget NEEDS are $3000/month
- Discretionary budget WANTS are $1000/month
- Retirement goal is for husband to retire at 67 and wife to retire at 65
When I first met this couple they felt very insecure about retirement. I think a lot of this fear stems from comparing how much you have saved to what you hear from friends or family. What this couple didn’t know was that they could very easily hit their monthly cash flow needs with some proper planning. Here’s the story..
The first thing we did was get clear on the monthly budget. Our most important objective is caring for your essential needs first and tackling your wants separately. In this example, the couple’s needs are $3,000/month and their wants are $1,000/month.
Next, we got a hold of their Social Security retirement statements.
To access yours:
- Go to SSA.gov
- Create a login
For this couple, the husbands SS at full retirement is $23,000/yr and the wife's is $15,000 totaling $38,000/yr before taxes. The current tax rules on SS income make achieving retirement for folks who don't have other significant assets or income very favorable.
See the chart below that illustrates how much of your SS income is considered taxable income:
For the purposes of calculating this couples’ income to determine how much of their SS would be taxable, we do need to include 50% of their SS income which in this case would be $19,000. So as you can see in this chart, if they don't have more than $13,000 in other taxable income sources their entire SS paycheck is TAX FREE! Awesome right?!
The next important piece to this story is understanding the federal income tax code. Look at the chart above, for a married couple filing jointly the first $19,900 of taxable income is taxed at 10%. To clarify what taxable income means, this is line item 15 on the 1040 tax return. This number is your gross income minus your tax deductions and standard deduction. A married filing jointly couple receives a standard deduction of $25,100 in 2021. We already covered that as long as this couple doesn't have another $13,000 of income that all of their SS income will be tax free. We also know that their monthly budget NEEDS are $3,000. So their SS income alone will cover that! AND they would like to have another $12,000/year for their WANTS which we can create from their retirement savings and part time work and guess what.... all of that will be taxed at 0% federal!! Why you ask? Because we only need another $10,000 of income to achieve their WANTS and if that was all we had for taxable income, the standard deduction would reduce your taxable income to $0. Long story short, this couple has their monthly budget needs and wants covered and only need to come up with $10,000 from savings or part-time work per year.
Simply put: Social Security retirement benefits and understanding the tax code play a much larger role in your retirement plan than you may have realized. It's possible that ALL of you your SS income could be taxed at 0%, moving you much closer to your monthly budget needs than you originally may have thought! Combine that with some distributions from your IRA's or maybe some part time work, and retirement is much more achievable than many realize.
Another retirement concern I hear is "what about health insurance?" Similar to SS retirement benefits, Medicare costs are also largely based on your taxable income. Part A is free for most, but other costs will depend on which parts you select.
If your married filing joint income is less than $88,000 you can expect your total monthly cost for part A,B and D to be around $178.50/month. Part C will vary depending on what you select which we can dive deeper into on another blog. In short, this makes access to health insurance also very achievable for most retirees.
The retirement conversation does not stop at Medicare and Social Security. As I referenced before, there are many decisions that need to be made. I could continue on and on with strategies and ideas (and don’t worry I will in the future), but I want to leave you with this: Retirement is doable. Motivate yourself on taking action to create your riding off into the sunset moment. As always, we are here to help you. We love a good sunset!
Max your Dash,
Nathan Elvers