In middle school in the 1970s I was in the advanced math class learning the things one learned in advanced middle school math classes in the 1970s. I was shopping with my Mom (who was a science major in the 1950s) and she was amazed I couldn’t figure out the price of clothes marked 10% or 15% off. She pulled me out of advanced math classes and back to the regular curriculum.
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Same with income tax rules.
A likely reason for sticking on patches of changes is that it leaves the rest of the system unchanged, so that people who like it the way it was will not complain if the parts that affect them are not the parts that got changed. But that means general growth in rules that increase complexity (e.g. special favored rates for some kinds of investment income, but with an additional tax that takes back some (but not all) of that favored tax treatment in some situations).
Also, the use of income tax deductions, credits, special rates, and other incentives in place of government spending to subsidize what was desired by those enacting them in another reason why income taxes are so complicated in the US. It is not hard to see why subsidies are done through income tax deductions, credits, special rates, and other incentives, since they are more politically durable (removing them is seen as “raising taxes” rather than “cutting wasteful government spending”) and also favor higher income people in many cases (deductions are more valuable at higher tax rates, and credits are only fully usable by lower income people if they are refundable). But the result is more job security for the tax preparation industry with more cost for everyone else.
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yes, if it was all pretax.
If you have any post-tax money in a 401k, you can roll that direct to a Roth with no taxes due.
btw: don’t blame the bureaucracy for the complexity – blame Congress who continues to pass. more complex tax laws, including subsidies, credits and the phase-outs.
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@BunsenBurner - Thanks for the link, from which I learned:
DW is having hip replacement surgery today, so I’m limited today and unable to look into the details, but she has a 401(k) with a combination of pretax and after tax money, which is heavily invested in a single, highly appreciated stock.
Maybe not “highly” appreciated, I’m not really sure, but I assume her average cost basis is no more than 25-50% of current market value.
We’ll need to think this one through.
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It appears that most of us here are fairly secure in our retirement preparation. But I’d like to go back to the original question about how much is sufficient to retire.
We all know that everyone’s situation is different, based on health, location, lifestyle, etc., and I think we’d also agree that that the generic advice that one needs x% of their pre-retirement income doesn’t make a lot of sense, since some might need a very small percentage and others need more than 100%.
I’d like some objective input because I’m trying to advise a friend. She is a hardworking immigrant and a compulsive saver. Single, and most likely will remain so. She’ll qualify for social security but I don’t really know what level. If all goes well she’ll own two homes free and clear before she retires, one to live in and one to rent out (currently rents for $2000/month).
She also has a Roth IRA but still relatively small.
Anyone have any thoughts on what would be reasonable goals for her?
How old is she and at what age would she like to retire? What savings/investments does she have now?
She’s 43, would love to retire early, but will work as long as it takes to feel secure. She owns two homes. Worth around $500k each. Has mortgages on both, probably $600k total between the two. Both at low interest rates, but she’s inclined to pay down quickly in order to get out of debt. Cultural thing, but at least she understands that it makes sense to keep the debt if she can earn a higher return elsewhere. Has maybe $50-60k in a Roth, invested in stocks. Also has a non retirement brokerage account with stocks and cash. Probably around $50k.
So her current net worth is roughly 500k, consisting of 400k in real estate, 50k in Roth, 50k in stocks/cash.
Also has a college savings account for her teenage daughter.
You probably already know all of this, but since I typed it…
It’s all about how much she needs to/plans to spend each month post-retirement. If the houses are paid off, it will obviously be a lot less. I assume kid will be out of college by the time she retires, so she won’t have to worry about that expense.
Where she lives and plans to live also matters. If we lived elsewhere, including a state with no state income tax, we’d feel better about our retirement. We have considered moving to a less expensive place, but so far we’ve decided to stay in HCOL/relatively high tax state.
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She has a fundamental assumption that the income from a debt free rental home will support her retirement in a debt free owner occupied home. I think this is naive, and that between taxes, insurance, and maintenance on the 2 homes, as well as the basic expenses of life, such as food, utilities, and auto expenses, that the rental income and social security won’t be sufficient.
Clearly, she’s doing better than most American single moms, but my gut feeling says she should try to build up an additional million dollar nest egg, between retirement and regular accounts.
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You’re correct that focusing on replacing a percentage of income is an upside down way to go about retirement planning
It’s about annual spending. Someone may earn $200k a year and spend $50k per year, while another person may earn $200k a year and spend $120k.
The person who spends $120k a year will need to hold a much larger portfolio than the person who is fine spending $50k a year.
There isn’t one right answer here about saving, investing, and spending; that’s personal preference, needs, as well as a dose of flexibility and perhaps prioritization.
I’d suggest to your friend that she track her monthly and annual spending so that she may come up with a realistic annual budget. If in the future she will no longer have the mortgage(s) she may deduct that expense, but she’ll still need to budget for taxes, insurance, and maintenance.
Once she knows her annual spending, then it’s a matter of apportioning where her income is coming from, and how much she may need from different sources: rental income, portfolio, social security, etc.
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A million dollars when she has two homes seems unnecessary. She can always sell a home if she needs money down the road.
She has done so well for herself because she lives under her means. This likely will continue as it’s ingrained in her to be a saver, not a spender. Knowing lots more info would help, but because we are talking in generalities, based on what you’ve said I don’t think she needs a million-dollar nest egg.
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@sherpa, other than the Roth is there any other retirement contributions/matching at her job?
I agree that the unforeseens of maintaining 2 homes on rental and SS alone could be dicey. And health insurance. Yep I’d advise, keep saving.
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I say definitely keep saving, but I don’t think she needs to save $1M before she retires.
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At this point, a low mortgage rate is the cheapest money you’ll ever have. We’ve never been tempted to pay off a 3% mortgage when our money can be invested for more than that. Historically. Max out your contributions to the 401k and don’t worry about a house with a 3% or less mortgage.
At 43, she needs a lot more money to create an income stream. If she can pay the mortgage on 2 homes, then she’s making a good amount.
Why 2 homes? Is one a vacation property? Or a rental? Or a property for other family members to live in? Is the 2nd home self sustaining?
I’m not a huge fan myself of real estate as a retirement vehicle. That’s just me and living in an area where our property values have lagged behind how the stock market has preformed. Besides if you sell that second home, you will have to pay capital gains, cutting into your profits.
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4% of one million is $40,000. That’s what they recommend to spend per year. And that’s more aggressive than other estimates.
Will $40,000 plus other income streams be enough for her to maintain her lifestyle?
Also she will be 67 before she will be full retirement age. If congress doesn’t change it to be older. How will she support her self before social security and how much will that dollar amount be? What about health insurance.
Unless she has a big bucket of college money or she and her D agree that college decisions will be based on Mom’s ability to pay and still save for retirement, she’s going to need to direct more of current income/savings to putting her D though college than she thinks.
If Mom is self-employed, remember that FA calcs include lots of things that W-2 folks don’t have o think about. FA folks may also conclude that Mom has lots of home equity in her properties to tap. Personally, I’d want to build her portfolio to get a better balance of assets and risk, by throwing money into into mutual funds. She has time for it to grow.
Agree with deb922 that $1M is a good target unless she lives in a very LCOL area. $40k + SS is not unreasonable (and remember inflation).
If she’s lucky enough to be in a pension plan, that changes everything. My dad and FIL had very little saved at retirement, but with a pension + SS, both with COL adjustments, it has been enough to live on (but not enough for AL/nursing home).
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Self employed so no pension or 40(k). Just the Roth. Will certainly want to retire before age 67, so need to keep that in mind for SS. Daughter thinks she’ll get an athletic scholarship, but I’m skeptical. I know the recruiting game, having gone through it with 2 kids; I should talk with her coach.
She also sends money home to her parents, which will continue as long as they’re alive.
I’ll try to help her with a projected budget.
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I do think the cash flow situation (which you have somewhat described) as well as what she plans to do in retirement – maybe she has some specific travel goals for example. There are some good articles out there with a lot of generalities, and maybe there are some specifics that she has worked with - like a calculator on her net monthly income (after all her major expenses and her monthly budget, an idea of funds she has available to do XYZ with).
Sometimes savers have a hard time making a change - fear about not having the income coming in and fear about some catastrophic need for the money (security issues). Being single may be part of this too.
My financial advisor was telling about a client who loves work, and was still working at age 70+. He is single and ‘loaded’. FA is having to help him with preparing/shifting funds or spending for RMDs and then once he is in RMDs to continue. He has a hard time spending. I do think there are some people who think when they stop their work routine or working, that they will die in a short time. Of course one sees cases where this has happened - maybe someone decided they didn’t feel good and then retired, but never visited a MD for years or if they had some health issues never went to get checked out.
One is her personal residence and the other is a rental. 3% mortgage on one, 2.5% on the other. I can’t fault her timing. The rental has a break even or slightly positive cash flow.
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Structured correctly, rental real estate can be a great asset to hold in retirement (but not in a retirement account).
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