Can I Afford To Retire? - Cravitz Financial & Insurance Solutions

Can I Afford To Retire?

Can you afford to retire and still maintain the lifestyle that you've become accustomed to?

It's unfortunate, but many people who can afford to retire don't realize that they probably actually can. Too often it is misunderstood how taxes work in your working years vs. once you are retired. Know that different sources of income are taxed differently. Most important is the after tax income that you will have available to you. This video will show an example of a couple the year before and then after they retire. Yes, gross income might be quite a bit less, but again it's the after tax that matters.

Full Transcript:

Oh yes, you probably can afford to retire. Well, maybe, maybe not. I mean, if you're in your 20s or 30s or 40s, probably not. I mean, some of you probably can, but most people, no. But here's the thing. There's a lot of people that are in their 60s that can afford to retire, but don't think that they can even afford to do so at all. In fact, the reason that I wanted to record this video, or that prompted me to think about doing it, is I was talking to a guy earlier today who said to me, he goes, "Ryan, I would like to retire," and he's in his 60s, "I would like to retire, but I just don't think that I could do so and really afford to have the lifestyle that I would like to be able to have and the lifestyle that we've become accustomed to," him and his wife. Well, I won't go into everything that I said, but I do want to go through and I want to share with you this hypothetical example, because, again, so many people can afford to retire, they just don't realize it.

So this is a purely hypothetical couple. So we have John and Jane Sample, and this is not that the guy that I talked to earlier today. Again, a purely hypothetical couple, and I set this up already so that we can go through it, and we're not going to look at everything related to somebody's finances, I just want to focus on the key things that are important here. So they're both 69 years old, and let's say that John is working and he's making $135,000 a year. Jane is not working. In fact, I'm going to make this so extreme as to say that Jane has never worked a day in her life. So John's working, making 135,000, and John plans to take his Social Security at age 70. So he's delaying until age 70, he's going to take his benefit then. He's got the highest PIA right now of $3,113, and let's say that Jane has no PIA. She's never worked a day in her life, let's say. Again, very extreme.

But let's just say that's the case. And, oh, this IRA withdrawal. Let me make that zero for right now. And see, I've already set this up. All right, so this is the situation. Their goal, they're going to retire next year. Remember, right now, they're 69. Next year, they're going to be 70. We don't need to worry about retirement expenses, annual retirement, health costs, longterm care cost potential, any of this stuff. So all I want to show you here first is just based upon his income this year, and right now I'm recording this in 2020, so when we look at this is the cash flow chart here, well, it will be here in a second when the program pulls up, but we'll look at the year 2020. And then I also want to take a look at the year 2021 right after that. So here's what's important. Take a look. This is year 2020. Income flows, 135,000 all coming from his salary. And total tax payment, so how much he owes in taxes on the 135,000, is 31,823.

Now, my software is pretty darn good, but anything tax related or certainly related to your specific tax situation, especially assuming I don't know you, you should definitely consult your tax advisor. But what the program is showing us here is the estimated taxes for this person with that income, federal taxes, 15,000 and change. State taxes, he's in California, my hypothetical couple here, so state taxes are also high, over 6,000. FICA taxes, over 10,000. That's the payroll taxes. And you can see that's the Medicare tax, Social Security tax, all built into there. So what really matters in retirement is, it's not about the pre-tax income, it's all about the post-tax, how much do you actually have after taxes? How much do you actually get to spend? And so their after tax income that they're living on right now is $103,177. So if he and his wife want to be able to maintain their standard of living, meaning be able to live on the same amount of after tax income that they're living on right now, well, this is the number really that matters, is this $103,177.

Well, close. So the other thing that he told me after I asked him is that he's also contributing to a 401K plan. So remember this. This is 103,177. So he's also been contributing to a 401K plan. Not a lot, but he told me he's contributing 6% to it. So let's add in the 6% contribution that he's doing to his 401K. We'll save that, come back to here. Remember that number is 103,177, I think. What's the after tax? Actually, let me check one thing here. Make sure this is only going until retirement. Yes, until retirement. Okay, so now, because with the 401K you're contributing on a pre-tax basis, what does that mean? Well, when we look at the cash flows what ends up happening is their tax payment now is at 29,287. You can see the planned savings, that's the 401K. And here's their unsaved cashflow. So they're not even living on the 103,177, I think it was. It's actually 97,613. I'll write that down. So 97,613 is actually what they're living on.

So if they can live on that amount of money in 2021, then they'll maintain the same exact lifestyle, except he won't be working 40 hours a week, of course. So let's take a look. So now, if their only income if they were to retire is Social Security, we can see that right here. In the year 2021, you see this income flows, 63,880? I'm going to go ahead and click on that. If I click on that, you'll see that right here, their Social Security that's combined. If I did that, you'd be able to see how much it breaks down between the two of them. But combined, the first year, they're living on 63,880, and then that goes up over time with inflation and such. So here's the other thing, remember, again, it's all about the after tax income. If their only income is Social Security, are they going to owe any taxes whatsoever? Well, the answer is no. You can see the tax payment is zero. So, really, already they want to live on 97,613. They're living on, if they just have Social Security, is 63,880. So 63,880 divided by 97,613 equals 65% approximately.

So, in other words, they retire in 2020 and 2021 and they just take their Social Security, their Social Security will provide them 65% of the after tax income that they were getting in the year that he was working. And that assumes only he ever made an income, and a high income, but only he ever made income. That only he ever worked, I should say. She's never worked, but she gets to be able to claim him off his record for the spousal benefit. So just that alone, they're at 65%. Now, in order to get that additional income, let's say, hypothetically, he's got an IRA. And let's say he took out, let's do 36,000, I think that'll be good, so 36,000 from an IRA. Remember, when you take a withdrawal distribution from an IRA or a 401K you're going to have to pay taxes on the withdrawal and the amount that you have to pay depends upon your other income and such, and your total income here.

So we get to the cashflow screen here, we're going to be able to see what their total assets after tax income is. And so I put in 36,000, and I could have put that a little bit higher actually, because you can see now their total tax payment's only about $4,000 and their unsaved cash flows now is 95,809. So about a $2,000 difference, not even quite that. So they can take a little bit more actually out of the IRA and be able to be left with exactly the same standard of living. Now, the question becomes, well, how much did they have to have in an IRA in order to comfortably be able to take out $36,000 per year? Now, we have different schools of thought and your situation could vary, but one rule of thumb is a 4% withdrawal rate. One is a 5% withdrawal rate. Certainly, the older you are and the less your prospects are for living a long life, the higher your withdrawal rate could be.

So let's just say, for instance, they had a 5% withdrawal rate. So at 36,000 at a 5% withdrawal rate, that would be like having a $720,000 portfolio today. So even though they're living on 135,000, that was his income, maybe he was saving a modest amount for many years but if that accumulated to around $700,000 and the 5% withdrawal rate would work out for him, which is a whole other video conversation, they could be absolutely just fine and not even have to worry about that at all. So remember here, it's just so key, it's this after tax income that really, really matters. And here's the other thing too. So often I find that people, let's say they want to retire at 70, most people I talk to, and this may or may not be you, but most people I talk to want to spend more money in their 70s when they're more active and healthier and all the rest of it, less money in their 80s, and then even less money in their 90s and beyond.

So they may be willing to take a little bit more out now maybe when they're feeling healthy and want to get out and travel and do things and things of that nature. So I'm going to leave this video at that for now. I hope this helps because, again, a lot of times people can afford to retire, and maybe that's you, maybe it's not, I don't know, but it's all about the after tax income. I hope this was helpful. I'll talk to you again soon.


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