Transcript:
Easan Arulanantham:
How much of my income do I need to replace when I retire? Do I have to replace 100%? Or can I just replace a portion of it?
Tom Vaughan:
Yeah, this comes up all the time, you know, people are trying to figure out what their retirements going to look like, what it’s going to cost. A lot of times, people don’t know what they’re spending now, right. So they got to start there, figure out what they’re spending now, you know, and go through that and make sure we don’t miss anything. Major, some things only come once a year. And you know, making sure that we’re not looking at the bare minimum, because there’s lots of surprises that come along. You know, I have three dogs, two kids and five cars, I get a lot of surprises and stuff keeps coming to the point where you kind of have to budget for it. So let’s say, you know, just for example, that somebody has hired $1,000 worth of income now, right, in gross. And they want to know, how much am I going to need in retirement? Well, first of all, first question I always ask, especially for somebody that’s getting closer to retirement, is how much are you saving into your 401k, let’s just say a person is saving 20,000, 401k, they’re not going to do that anymore. So they’re really living off of that $80,000. So a lot of times people kind of just maintain the same standard of living that they had prior to retirement. So that standard of living is 80,000, right, versus 100 that they’re making. So now we’ve got a number down to 80. And then oftentimes, we have a scenario where there’ll be less tax, right? For variety reasons.
Easan Arulanantham:
So you have your FICA taxes, so you have your Social Security and Medicare, and that’s 7.65% of your income. And so and FICA tax has always taken pre over your total paycheck. So even your 401k contributions have that FICA tax still taken out, right.
Tom Vaughan:
And so you won’t have that, because that’s an employment tax, and you’re no longer employed, you’ve retired, and you probably save other tax dollars, especially in the first party retirement because you might be able to take money from assets that have capital gains tax instead, ordinary income. So let’s just say for example, that 100,000 saves 10,000. So we save 20,000. And savings, you know, in this hypothetical case, but that’s what you’d want to figure out how much you actually saving, you know, at that point that you can take out another 10,000 in this case, 10% for taxes. Now we’re at 70,000. Right? So now, now you want to look at kind of the different things that are going to happen in retirement, because now every day is a weekend. And I don’t know about you, but I tend to spend more money on the weekends. I’m too busy during the week. You know, I’m working all the time. And now I’m retired, let’s say and hobbies or travel or you know, whatever it is, that happened. So that could be an increasing cost. Yeah. And so you got to kind of factor that back in.
You’ll save some money, though, in other areas, for example, maybe you’re not driving as much. Yeah, so you’re not driving back for it to work out. Or maybe you’re not doing that now anyway, because there’s so many people working from home. But, you know, obviously, you have less gas, and maybe clothes, you know, you don’t spend as much money, you know, in clothes. I mean, I I honestly sees the clients come through the lobby that have, you know, similar style as to when they retired because they’re not wearing them out. You know, they wear their nice clothes to come in and see me, but they don’t have to rebuy those all the time for all their corporate meetings, or whatever it is that they were doing. Right. So yeah, it’s, you know, that’s the issue, I once had a client tell me, you know, at some point in your life, you get off the fashion train, right? And just your clothes cost goes down pretty substantially if you just keep wearing the same things all the time, right? Polyester lasts forever. So anyway, that’s that’s kind of what you know, you look at and what are the pros when the pluses and the minuses and the plus on travel and a minus on gas? And you know, the different clothing aspects? And what’s happening with you know, the taxes, what’s happening with the, you know, overall scenario that happens with your savings that you probably won’t be doing?
Easan Arulanantham:
Yeah, I think it’s a lot easier to so look, try to think about replacing your income but thinking about how do I afford my expenses, my cost of living or my style of living? And so that’s what you should be looking for. And some other expenses that may drop off is it’s pretty common to have a goal to pay off your house by the time you retire. And so that’s a big fixed income or fixed expense, I can just drop off that makes it your life so much more flexible in retirement.
Tom Vaughan:
Yeah, that’s a big one. We see a lot of people that if they haven’t done it right at retirement right before, they’re on track to do it fairly soon thereafter. Right. And so that that’s another you know, basically a cost it’ll disappear and yeah, They’re all there, I’d say I’d see probably in that 70 to 80% of current income, quite often. You know, as far as that goes, you know, the ongoing costs are, that’s not a bad rule of thumb, but you can pretty easily kind of do some little figuring and to kind of get it right. It is an important number to get right when we do the financial plans is one of the more sensitive numbers to go from 70 to 75,000. It takes a lot more assets to make that work. And so then you end up with a situation where, you know, you’re getting that extra 5000 Every single year for the rest of your life. Plus, it’s growing with inflation. So it makes a big difference versus you know, buying a car every 10 years. It’s not as you know, even though it does go up in cost. It’s not as frequent. It’s not every year, right, that type of thing.