If so, I've created a few of those spreadsheets in the past. The challenge is that they tend to be linear in their analysis. In other words, they don't consider the fact that you aren't always going to get the same 5% year after year on your money. This year might be a good example. If your plan is squeeking by, instead of being extremely flush at the end, I'd suggest another opinion from a fee only advisor at NAPFA.
To EB, I think having a current budget on all expenses and also considering inflation of 3%, and also taking into consideration your federal taxes on current income, should give you your cash flow considerations. However, the monies that you will need for the car for your daughter, four years of college and a possible marriage should be looked at -- how much monthly payment you can make, or take a lump sum from other accounts you might have.
Hello Jake S, the budget process you describe might be used to get a realistic sense of what your current spending is, an from there, you can extrapolate what your retirement spending might be. So, it is a place to start, but the challenge is to development the spending plan for your retirement years, as this is the basis for determining how much you need to save for retirement. Please don't lose sight of what professional advice might add to your process, especially if you are getting a late start.
Just two hours to go! Thank you to all of the advisers who have been with us so far today!
Jake, the software we use makes it very easy to inflate different streams of income and or expenses by different amounts (like a mortgage or pension that will never increase vs rent or food expense or cars that will). Your thought process is spot on but you just may not have the tools available that will make this easy. When people ask about my hourly rate I remind them that I pay for some very useful but sometimes very expensive tools. I think an advisor that works hourly could make this a fun process for you...much easier that a hairy excel spreadsheet.
Hello, this is Lon Jefferies, CFP at Net Worth Advisory Group in Salt Lake City, Utah, joining the discussion.
Joining us for the home stretch are Lon Jefferies, Tyler Gray, Scott Draper, John Wenzel and Delia Fernandez. Welcome!
Jake, I'm not sure I can add much to what others have said already about the budget analysis, except I'll echo Bobbie's and Alice's comments in that to get a really detailed and accurate analysis, you'll want to utilize financial planning tools that financial planners have access to. And just to state the obvious, we can plan all we want, but the reality is, none of us has a crystal ball so it's important to keep in mind you may need to be flexible, especially if you're getting a late start.
Bobby, great question! I think the more appropriate terminology is to save AT LEAST 10% of gross income. Saving 10% frequently puts individuals on pace to meet their minimum retirement goals. If you want to give yourself options such as retiring early or buying yourself nice toys during retirement, you should be saving 20%+. Of course, this savings rate fluctuates depending on how early you get started.
Bobby - Many planners are trying to reach a wide audience with their advice. While saving very large amounts of income is possible and admirable, it might sound unrealistic or intimidating to a general population. I work with each my clients individually to set achievable goals, whatever those might be.
Bobby, great job! That's awesome, congratulations on an early retirement! I can't speak for other planners, but I'd say for myself, my goal is to help my clients balance planning for the future, while also enjoying today. None of us is guaranteed tomorrow. As the old saying goes, "Our life is but a vapor that appears for a little while and then vanishes away." For the average income level of most Americans, if they saved 40-60% of their income that would leave very little left over for today. With that said, I'll echo Lon's guidance in that 10+% is a usually a minimum "average" guideline and everyone's situation is unique.
Bobby I think people should save at least 15% to cover retirement. That said, retirement is often hollow and leaves people without a reason to get up in the morning (though my ex assured me he could fish everyday of his life). I talk to people about financial freedom. And it sounds like you have done a great job of finding financial freedom for yourself. Good job and good luck!
Also, keep in mind that "early retirement" is a bit of an undefined phrase at this time. Someone who is only 40-50 years of age really doesn't know how long they will live. Currently, someone who is currently in that age range might anticipate living until around age 85. However, with how quickly life expectancies are increasing, that person may in fact live until age 95 or 100. That makes planning for something so distant in the future pretty difficult. All the more reason to save at an increased pace.
Jake, you can find any of the excellent planners here on advisor search at napfa.org.
Bobby, Lon makes a good point. I worked the other day with a 35 year old who has done an excellent job of saving and, without any inheritance, already has 500K. He wants to retire at 50. Certainly he will have a good pile of money by then BUT when we worked the numbers with him living well into his 90s the numbers were tight. It is hard to save enough in 30 years to live another 45-50 years.
Mary, the question about at which tax rate should I stop converting my traditional retirement plans to Roth retirement plans completely revolves around what you expect your future tax rate to be. Quite simply, if you think you are likely to be in a higher tax bracket it the future, it likely makes sense to continue converting dollars now, paying a lower tax rate than you would in the future. Alternatively, if you think you are likely to have a lower income, and thus, be in a lower tax bracket in the future, then I would probably not convert to Roth accounts at this time. Why convert now and pay a higher tax rate when you could simply continue to obtain tax-deferred growth and then pay taxes at a lower rate in the future?
Lon, another spot on answer. I often see people in their 50s putting money into a ROTH when they a. could use the deduction now and b. are likely to have very little tax liability in retirement.
Mary, something else to consider is that there's no guarantee what tax bracket you'll be in the future since Congress can't seem to make up it's mind about anything for more than a few months (or a few years if we're lucky!). This is one reason most planners will recommend some form of "tax diversification." In other words, it makes sense to have your money spread out across accounts with different tax treatments if at all possible. That way, you have flexibility when you go to withdraw the money in retirement.
Bobby - you are exactly right. That tax deduction is pretty darn valuable for people in their peak earning years. Further, I have many clients whose only income during retirement is Social Security benefits and small IRA distributions. In these situations, if the IRA distributions are small enough, the client ends up paying federal taxes at a rate of 0%! Pretty appealing!
Tyler, future tax rates are such a mystery. But I would be they aren't going to be any lower:-)
And Lon, many states, like Georgia, have a retirement income exclusion allowing more seniors to pay little if any Georgia state tax.
I saw that Bobbie. Looks like Georgia could be a pretty attractive place to retire.
Not as good as Florida where I live now....NO state tax at any age.
You wouldn't think Bobbie, but you just never know! I think it might have been Rick Perry who was floating the idea in the last presidential election of a flat 9% rate for everyone? All I know is a crystal ball on tax rates (and investment returns as we mentioned previously!) would be super helpful! :-)
Hi Mary, I agree with Lon. It depends on your outlook regarding tax rates and rate you believe you will be in upon retirement/ when withdrawing from the account. To Tyler's point there is a balance that needs to be struck between after-tax investments and pre-tax investments. This way, you can have some control of how you are pulling from your accounts and replacing your income. For most, the savings has been done on the pre-tax side which makes it harder to control the tax bracket you'll be in during retirement.
BB, I think Tyler's earlier point of tax-diversification is very relevant here. First off, given the nest egg you have established, it looks like tax implications are going to be quite significant, regardless of which strategy you pursue. For this reason, diversifying your investment portfolio from a tax perspective is definitely a winning bet because we have no idea what tax rates might look like in the future. One strategy you might explore is to balance the amount of IRA distributions taken between retirement and age 70.5 (when you must start RMDs) so that you withdraw just enough funds in order to take full advantage the lower tax brackets without breaching the higher tax brackets. Taking distributions earlier than age 70.5 will help lower your required minimum distributions when the time comes.
Hi BB, given the low tax bracket you are in, it might be worth considering converting some of your IRA account to a Roth IRA. Just be mindful of your tax brackets. You don't want to convert too much and push yourself into another tax bracket. Be mindful that the conversion will be income taxable. Also, I know you didn't ask this but you should consider some SS optimization strategies to get the most bang for your dollar our of SS.
It is important to do what we can to reduce RMDs because once the RMDs are in fact required, it is too late to take action. At that point, we're simply stuck with the tax rate the federal government imposes. By comparison, taking action before RMDs start at least gives us a chance to choose between various options.
Great point John. Mary, you and your spouse likely don't want to simply file for Social Security at age 70. There are almost certainly better strategies, such as one spouse filing for benefits and suspending, which would allow the other spouse to claim a spousal benefit while continuing to allow their own benefit to grow.
BB - It sounds like you are asking a question about your investment allocation. Although the time until retirement is fairly short, you'll need those assets working for you for many years into the future. I would continue to maintain a diversified allocation so you can stay ahead of inflation and grow your assets into the future.
Hi Bobby, you are referring to an issue that many fee-only financial planners are constantly trying to address. The term "financial planner" is a very confusing title for many consumers. Unfortunately, most consumers hear "financial planner" and they think of someone who manages an investment portfolio (or even worse, someone who is going to try to sell you something). Fortunately, there is a small portion of financial planners who recognize that there is a lot more to our profession, including retirement planning, insurance coverage, estate planning, tax efficiency, etc. If you are looking for that type of planner, be sure to check out NAPFA.com and utilize the term "fee-only."
Bobby, thanks for pointing this out. As Lon said, we are often dismayed by the confusion. Indeed for us, investing usually comes AFTER the planning. How do you know how to invest for someone if you don't know their situation and their goals?
Hassan, you can't go wrong with any of the ones you mentioned.
Hassan, it sounds as if you're asking the pros and cons of using a balanced fund or moderate allocation fund vs. individual funds that focus 100% on bonds or stocks. Is that correct?
Hassan, Bobbie Munroe is correct, you've listed some excellent funds. Sometimes I find that my clients are more comfortable using a balanced fund as an anchor for their portfolio because they don't like to watch the ups and downs of 100% stocks or 100% bonds.