You need less to retire than you think! I have been preaching for a while now that many individuals have been fooled into thinking they need some ridiculously large sums of money in a retirement plan in order to retire. This is just not true. But, commissioned based investment advisors and financial planners don’t make any money on the clients paying off debt and positioning themselves for retirement through avenues other than accumulating assets.
At Joseph F. Fragnoli, CPA, PC in Nashville, we look at individuals’ retirement and financial plans with a global look in mind. By that I mean that we look at their current tax position, their projected retirement goals, their current debt structure, their current financial position and their true cash flow needs currently and at retirement. I have used the sample question on numerous occasions, “how much money would you need on a monthly basis if you were debt free?” Many people, too many, do not ask themselves that question. I frequently get the answer, “I am not sure”. So I will say to the person, if you have no mortgage, car payment or other debt service requirement, could you live the lifestyle you want on $5,000 per month? The answer is almost always yes.
While I am a huge proponent of qualified retirement plans and individual retirement accounts (IRA’s), one of the things to consider is that withdrawal from these type of accounts are taxable. Accordingly, one must account for the income tax in determining the total amount required to achieve the net expendable income available to the retiree on a monthly basis. Now, if structured with other sources of income, I can show a client that they can general $5,000 per month and more where they will not pay any income tax.
I run across people all the time that don’t bother funding for retirement through qualified plans because they don’t believe they can accumulate enough assets to retire, especially if they are late to the party. I advise them that they need less than they think and tell them to fund that IRA, fund the 401(K) to gain the maximum on the employer match or put away funds in some other retirement or asset accumulation source. Just put away something. It is going to take less than one thinks to be able to fund a decent retirement.
Under current federal law, if you take one half of your Social Security benefits and add that to your other income sources and the result is less than $25,000, 32,000 if married filing jointly, then none of the Social Security benefits are taxable. However, keep in mind that a taxpayers are entitled to claim a standard deduction and personal exemptions. The standard deduction is $6,300/$12,600 when filing single/joint. If you are over 65, an additional deduction $1,550/$2,500 can be claimed. Finally, a personal exemption of $4,050 per eligible individual (subject to phase-outs) can be claimed. Together, these deductions can total $11,900/$23,200 when you file. Accordingly, your income, including one half of your Social Security benefits would have to exceed $36,900 if you file single and $55,200 if married filing jointly before you are subject to any income tax.
Another factor to consider is that as long as your taxable income (that is the income after your deductions stated in the preceding paragraph) is less than $37,650 for a single person and $75,300 for a married couple, then none of your capital gains are subject to income tax. Accordingly, building taxable investment accounts can have a financial benefit down the road.
If you throw in some limited distributions from a ROTH IRA or ROTH 401 (K) account and you can get to the $60,000 of income with no income tax. You can also sell some securities held in a taxable investment portfolio and have some capital gains that are taxed at 0%. Accordingly, it is not too difficult to build a retirement plan structure that will pay out $5,000 per month net of tax/ zero tax.
Imagine, $2,500 to $3,000 per month of that $5,000 monthly total can come from Social Security. Now the couple only needs to accumulate the assets or income producing resources to generate $2,000 to $2,500 per month. That is very achievable even if you are late in the asset accumulation process.
So, if you are concerned with retirement and you can’t see how you are going to get there, don’t give up. Call me, Joseph Fragnoli, at (615) 678-4751 and let me show you how you can get as close as possible to your desired goals regardless of how late you are to the party.