When Will You Be Able To Retire?

When will You have Enough Money To Retire?

Brief History Lesson:

The term “retirement” came to be recognized when the Social Security Act of 1935 allowed people to quit work and collect a tax funded paycheck when/if they reached the age of 65.  Of course, the average life expectancy at the time was only 62.  Due mostly to significant medical advancements, life expectancy’s continued increasing and people began looking forward to living beyond age 65 and collecting a paycheck as a reward for their lifelong hard work.  Retirement was billed as a life of leisure and relaxation.

How will you replace your pre-retirement income?

It’s really scary to think about when you may be making six figures and can’t imagine the interest from your savings being “enough” to live comfortably on.

Let’s use an straight forward example.

You’re 50 years old and earning $120,000 per year.  By the time you are 65 you may be earning $200,000, and hope to be able to get by on $120,000 a year at retirement.

Possible Expenses:

In an environment with a 15% federal tax bill and 5% state tax rate, you would need to have a pretax income of $115,500/year to make this work.

As you can see, almost half of your monthly overhead comes from the mortgage payment and property taxes.  If you live in DuPage County, IL, you may have refinanced sometime in the past few years and still owe on your mortgage for another 20-30 years.  Also, property taxes are quite high in this area and are only going up every year.

Retirement is much more manageable if do not have a mortgage or move to a smaller home or a home in an area with lower property taxes. If we reran the numbers with no mortgage and property taxes of $400/month the numbers change dramatically.  That would save $2,600/month bringing your need down to about $5,000/month after tax or $75k of gross income needed annually.

Retirement Income

What are your sources of income at age 65?

1. Social Security (if it’s around) – $30,000
2. Your 401k and IRA’s – Currently worth $400,000 – Worth $1,000,000 at age 65
3. Pension (I’m going to assume the answer is Not Applicable –  those with a nice pension have it pretty easy in retirement)

What can you hope to comfortably pull every year from a $1,000,000 investment account without digging into principal?  One rule of thumb is 4% or $40,000.

That means your retirement income would be $70,000 ($30,000 +$40,000).  That’s a far cry from the $200,000 you were making at the end of your career. If you downsized and moved to a low property and no income tax state like Florida you could be good to go.

The most common question i get these days is “when”. When can we afford to get out of what we are doing today.  Surprisingly, in many cases people can quit their current job and make it just fine in the long term assuming they find other work and are willing to do it for several years.

Sure, you could sell your home and move to something much smaller and get by, but is that the route you really want to take?  Taking out more than 4% of your investment account is considered risky, so that is not a good option.

The best option, find something you enjoy doing and get paid to do it.  If you can continue working, even part-time and earn a fraction of what your full-time job paid, that will make the retirement income dilemma much easier to get through. 

I would like to hear what your retirement income plan is and what you think is the key to successful retirement will be for you.