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Money Basics: Retirement

Retirement is simply a time when you need to cover your living expenses with your assets instead of employment. You’re using your money and not your time to support your lifestyle. The conventional wisdom about retirement is that you need to hit a specific number in your investment portfolio in order to achieve it. In reality, there are a number of different ways to make retirement a reality- only one of them being a bucket of money equal to 80% of your pre-retirement income.

Taxation, investment diversification, and your lifestyle all come into play here and aren’t usually factored in when using an online retirement calculator.

Even looking at stock market investments only, the types of accounts you use make a significant difference in what you can spend and how much you need for retirement. One million dollars in a Traditional IRA is not equal to one million dollars in a Roth IRA when it comes to actual spendable retirement income because of taxation. If I had $1M in a Roth IRA and planned on taking 5% out each year for retirement, I’d have $50,000 to spend with that first withdrawal. If I had $1M in a Traditional IRA and was planned on taking out 5% each year for retirement, I’d only have $37,500 [or a different amount based on the tax rate you want to use] to spend with that first withdrawal because of state and federal taxes. That’s a BIG difference. The Roth IRA offers tax deferral on any earnings in he account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. Assumes [%] state and [%] federal taxes, and if made prior to age 59 1/2, a 10% penalty tax may apply.

Investment diversification comes into play because one of the primary goals of the retirement game is to have your assets generate income for you that doesn’t require your full time or attention. Again, the taxation of the income matters here when determining how much of the income you’re generating you actually get to spend, but at the end of the day there isn’t one clear path to retirement.

The last factor is lifestyle. I have several clients who have no intention of continuing their same lifestyle once they retire. They want to move to a cheaper city in the US or to a beach town somewhere internationally (Colombia, Costa Rica, and Bali are several mentioned). In this case, there is usually no need to save for a retirement income that is equivalent to what they’re earning now unless they want to retire 10 years early. If that’s a goal, great! If it isn’t, they may be able to add an extra vacation per year (or two!) to their eventual retirement spot now while they’re still working- guilt free.

Retirement savings shouldn’t be this looming, scary eventuality. It also shouldn’t be one-size-fits-all because just like everyone has different lifestyle choices in terms of where they live, what cars they drive, what restaurants they frequent, and however else they spend money, everyone has different retirement goals, risk tolerance, and plans. Shooting for some huge retirement number in an investment portfolio is not the smart way to plan for retirement- evaluating ALL of your investment and taxation options and factoring in your desired lifestyle (both now and in the future) is. Once it’s looked at from this perspective, with new eyes, retirement actually feels attainable (because it is!) rather than a stressful, unachievable burden filled with sacrifice. Whether your personal retirement plans involve leaving your job at 40 or at 70, your income now should help you get there as efficiently as possible- no unnecessary over saving and sacrifice. Believe me, it’s possible.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.


Money Basics Series

Although there are certain basic financial rules of thumb that many people can agree make sense at face value (like “a house is always good investment”, “you should try to save as much money as you can for retirement”, and “you should always spend less than you make”), making financial decisions solely based on these rules of thumb is probably not going to help you maximize your money and can actually cost you big time long term if this advice isn’t in line with your personal goals and values.

That being said, after working with hundreds of clients, we realize that there are certain beliefs and fundamental principles we operate off of at Peterkin Financial that color the way we look at planning and consequently the way we advise our clients. Client goals and values followed by data and numbers always trump general rules of thumb, but we feel it is important to share them just the same. So we've decided to create a blog post series of what we’ve coined “Money Basics” so you can better understand our perspective as a planning team.