Here's the nice job my little snow blower did on my driveway in an earlier storm. Yesterday's storm wasn't quite as bad as they predicted, but I will need to go out and clear maybe 6 inches of snow.
To continue a previous post, I decided to look up my total annual expenses for the last five years (yet another analysis that wouldn't be possible if I hadn't been tracking all my expenses for years), to get a more realistic idea of what my expenses would be in retirement.
Here they are:
2008: $44,141
2007: $42,772
2006: $44,101
2005: $44,929
2004: $43,029
The average is $43,794. However, this includes my regular mortgage payments and my mortgage prepayments, neither of which I'll have when I'm retired. (I should have the mortgage paid off at age 56.)
My prepayments have varied over the years, but using last year as a baseline, if I deduct the prepayments and mortgage payments from my annual expenses, my annual expenses then drop down to just $31,494.
I also spend a considerable amount each year on home maintenance, a cost I think will be mostly eliminated when I retire since I plan to buy a condo, although there will be monthly condo fees. But my home improvement/maintenance costs are considerable.
2008: $5,789 (new chimney liner, expanded brick patio, replacement window, 2 trees cut down)
2007: $4,126 (exterior house painting)
2006: no major home improvements due to $7,985 in medical/surgery bills
2005: $8,092 (basement drainage, chimney rebuilt)
2004: $7,996 (curtain drains, wall insulation, garage door)
Although I didn't include it here, I also spent a considerable amount of money on new furniture, a new bed, etc., which I wouldn't anticipate spending so much on in the future.
My goal is to ensure I have a comfortable and worry-free lifestyle in retirement, where I could splurge on travel and other enjoyable activities and be able to pay my healthcare bills. My preference is to scrimp, save and live a frugal lifestyle now, while I'm middle-aged, rather than have to do so in my later years when I'm less physically able.
The justification for traditional IRAs has been the assumption that your tax bracket will be lower in retirement, which is when you'd be withdrawing that IRA money and being taxed on it. I was never sure that would definitely be the case. That's why I've been contributing to a Roth IRA ever since Roth IRAs were created; you don't get a tax break when you contribute, but you also don't have to pay taxes when you make withdrawals.
I guess you could say I'm hedging my bets by having both traditional IRAs and Roth IRAs. I looked into converting some of my traditional IRAS now that their value, thanks to stock market losses, is so low, but I still found myself resisting the idea of having to pay a big tax bill when I made the conversion. So I decided to just leave my traditional IRAs alone and continue building up the Roth IRAs each year.
To minimize my taxes, I will draw down my traditional IRAs before I touch the Roth IRAs. At some point, I'll need to start collecting Social Security payments, but I hope to live on my IRAs for a number of years. Each year you defer collecting Social Security past the standard age of 62, you gain about 8% in payments.
I don't make out any of these calculations to be cast in stone, since there are too many variables that will put them somewhat out of whack. Taxes, as mentioned before, will most assuredly go up in future years. Social Security will likely undergo some restructuring, possibly in the way of lower payments. And of course the direction the stock market takes in the next decade will have a large impact on how much my nest-egg grows.
All of this is still quite a few years away, but I enjoy crunching the numbers. Doing so keeps me on the straight and narrow.
Retirement Planning Calculations
January 11th, 2009 at 06:57 am
January 11th, 2009 at 07:05 am
BUT, just wanted to point out, just because you hit the 25% tax bracket, only the income above that amount is taxed at 25%. So, if you go a little over, it's not as bad as it sounds. Or maybe you realize, but just wanted to make sure.
January 11th, 2009 at 09:33 am
January 11th, 2009 at 11:06 am
January 11th, 2009 at 12:28 pm
January 11th, 2009 at 12:40 pm
I think your calculations are actually quite conservative. You will be able to get far more than 7 1/2 years of living from your IRAs due to interest you will earn (e.g., ~4% of $244,000 = $9000+ a year). Then if you decide to take on freelance or part-time work, this would augment your income and result in smaller withdrawals.
Another source of potential income is your home if you downsize. A condo might cost less and leave you with an additional cash cushion that you could tap for traveling or unexpected needs.
I was concerned that once I retired, I'd be spending more due to having more time, but the opposite has been true so far. I am spending less on food, gas, and clothes.
Does social security get taxed? I am not eligible for SS due to belonging to a teacher's pension system, so I do don't know much about SS. My pension is definitely taxed.
January 11th, 2009 at 01:03 pm
I planned to move to a condo (paying cash for it) and hopefully pocketing about $25,000 from the sale that i would put into savings. Although i am still wavering about whether i'd be happy in a condo or happier in a smaller house, say a simple 2-bedroom ranch. It would be very hard to give up gardening completely. Well, i still have time to mull it over.
Yes, i'm poretty sure Social Security is considered taxable income. I had no idea that someone with a pension could not get SS! I thought every working adult with enough time put into the system was entitled ot it. Guess i just learned something new.
January 11th, 2009 at 05:19 pm
For example : my mom, who earns about $10k+ from her part-time job and $16k+ from her SS, does not/has not paid taxes on the SS portion.
January 11th, 2009 at 06:36 pm
You have 244k in IRAs now. Most planning suggests you can take 4 percent out and the money will last 30 years (age 60-90). 4 percent is 9k per year.
You have 11 years to retire by my math, you might get 2 doubles from the 244k (assumes close to 12 percent return), so the 9k becomes close to 36k in income if that happens. You deposits will also help this.
Taxes are included in the 4 percent... you could optimize this by converting to a Roth when in lower bracket during retirement... (cap off top of whatever tax bracket you are in).
I expect tax brackets to always exist. Remember for single people the first ~10k of money is tax free (std deduction+exemption).
If the 15 percent bracket changes, it will be considered taxing the poor. It might go up to 16 or 17 percent... but not much higher, IMO. The 33950 cap changes every year (goes up), so the limits are tough to plan around.
I agree getting the deduction now makes sense. If you look at a withdraw strategy more with 11 years to go, you can probably save more in taxes as well.
January 12th, 2009 at 06:50 am
God, could they make it any more complicated for planning purposes?
January 12th, 2009 at 11:45 am
I would do some backwards planning:
You KNOW you need 32k per year.
If SS did not exist, you would want somewhere between $800,000 (4% withdraw rate) and $640,000 (5% withdraw rate) for savings to last 30 years.
The 32k is above SS "taxation" threshold, so I think its best 11 years away to not count on SS, then once you turn age 62, you may decide to adjust withdraws to prevent that hidden 50% tax bracket or 85% tax bracket with SS benefits.
Second issue, assuming you did find a way to get 800k in IRAs for when you retired, I would look to see if the RMD (required minimum distribution) on 800k is above or below the 32k income you need.
RMD is the governments way of making sure your IRAs get taxed. You can take out more than the RMD, if you take out less there are taxes and penalties.
Regardless of the RMD, you should plan to do some roth conversions in 15% tax bracket when retired. The way a conversion works is this-
In 15% tax bracket for single, the current TAXABLE INCOME (2009 table) is 33950 (you already posted that). The amount you can withdraw (single) and still be in 15% bracket is $9350 higher ($5700 std deduction and 3650 single exemption)- so you could withdraw 43300 and still be taxed at only 15%. The 11300 extra (the amount above the 32k you need) should be converted to a Roth. What this will do is lock in the current tax rates and take away the risk of rising taxes (in retirement).
This would also reduce the RMD the following year. It would be important to do this before you collected SS, because the extra income might cause more of SS to be taxed.
January 23rd, 2009 at 05:18 pm