We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for June 24, 2024
Radon and Murs discuss the income needed during retirement. It’s important to understand that spending needs in retirement will differ significantly from your current earnings due to various factors such as taxes, savings, and job-related expenses.
Learn about a comprehensive approach to estimating retirement expenses by identifying costs that will decrease or disappear in retirement. You will also learn about expenses that will remain constant or increase during retirement and the importance of examining your current net income and expenses to understand your spending patterns better.
Today’s topic is something everyone who is thinking about or in the middle of retirement planning is concerned about: how much money do I need in retirement?
How do I figure out my income?
If you go online and use one of the calculators that claim to help you figure out the income you need in retirement, many will examine your current income and state that you need 80% – 90% of this figure in retirement.
For example, if you make $100,000 a year, the calculator will likely state that you need to have $80,000 in income each year in retirement.
We don’t like this approach because prior to retirement, you may be earning a high income, have heavy contributions to your 401(k), and other current expenses that you may not have in retirement.
Let’s dive into how we start to approach the income in retirement question.
What are Some Things That You Won’t Be Spending on in Retirement?
When you’re working, you’ll pay for a lot of things that you might not even realize that you won’t be paying for in retirement. A lot of these expenses will go down or be fully eliminated in retirement, starting with:
Commuting costs: Depending on where you live and go to work, you are spending time and money getting to and from work. Your commute costs will drop, which may mean gas, bus tickets, train tickets, parking, and other transportation expenses.
Attire: If you wear a uniform, suit, dress, or other work-specific clothing, you will not have the added cost of regularly buying and maintaining these clothes in retirement.
Professional development: If you take continuing education courses or pay to maintain licensing, these costs will also be lower or eliminated.
Food expenses: A lot of people go out for lunch because it’s easier to go to a restaurant or cafe than to make lunch at home. You may have a routine of going to a specific spot near your work to grab something to eat or drink before or after work. While $10 – $30 a few times a week or every day may not seem like much, it adds up quickly.
FICA Payroll taxes: You won’t need to pay FICA (Federal Insurance Contributions Act) payroll taxes, since they only apply to wages.
Child-related expenses: Kids will, hopefully, be out of your budget when you retire, too. Of course, there are some exceptions, but you likely won’t need to help pay for college or other expenses relating to raising your kids in retirement.
Travel: If you travel a lot for work, hotel, meals and transportation will go away.
Memberships: Any work-related memberships that you have you won’t need to pay for anymore.
Contributions: You won’t continue to add to 401(k) or IRA contributions. Some working folks are adding $30,000 to their 401(k) each year, which is a significant boost to their after-retirement income.
Any of the associated work expenses that you have will come off when you retire, which can dramatically decrease your expenses.
While not exhaustive, this list is a good starting point to think about things you are paying for as a working person that you may not need to pay for as a retired person.
How Much Money Do You Have Coming in Each Pay Period?
An easy way to start thinking about your income is to consider how much money you have coming in each pay period. If you have $8,000 coming in a month and can save $4,000, the rest of the money is for expenses.
But, what on the list that we just mentioned will you not be paying for any longer?
Some expenses on the list will still be there, even if they’re reduced, and we need to account for them.
You will still need to pay for:
Housing costs. Even if your home is paid off, you need to pay for things like property taxes and utilities. Our software will be able to account for mortgage payments that may only be there for a part of your retirement and will drop off.
Health insurance costs may change, and these costs may go down on Medicare. If your employer pays 100% of your healthcare costs, then your expenses may go up in retirement. You may even need to cover your own healthcare if you retire before 65, and all these expenses must be considered and accounted for to know how much money you really need in retirement. Shawn Southard, our Healthcare Professional Specializing in Medicare can help you find the best solution for your needs.
Many retirees have very busy schedules, filled with hobbies, events, and travel. You’ll likely need a car, so determining a budget for gas and car maintenance is important.
Insurance needs will vary, but you may need homeowner’s insurance, life insurance, long-term care insurance, and others.
FICA payroll taxes will be gone, but you’ll still need to pay Federal and State income taxes.
Hopefully, you’ll be at a place where you don’t have debt when you enter retirement. Debt and the high interest rates that come with it will impact your income.
Fun Stuff in Retirement
You’ve worked hard to reach retirement and you should plan to have some fun. A few expenses that you’ll need to consider are:
Travel costs
Date nights
Visiting family
Equipment and supplies for hobbies
Oftentimes, we can employ strategies to reduce income tax in retirement, and what helps with planning and strategy is knowing how you plan to spend your money in retirement.
Income matters. When you know what you’ll be spending, that’s when you can really see if you have enough in retirement to live the life you want.
When you’re working and earning a good income, you may not be overly concerned about swiping your credit card, and it can put you on autopilot because you know that you can pay for these expenses.
Once you understand your expenses and wants for the present and future, it puts things into perspective and gives you something to work towards.
We work with our clients to build a retirement-focused financial plan specific to their situation and goals. We build out the plan and provide ongoing communication to help you understand your expenses so that you can move closer to your retirement goals and what you want in retirement.
If you’re interested in having us create a retirement-focused financial plan for you, we would love to hear from you.
Get in touch with us and we’ll schedule a 15-minute consultation to discuss retirement with you.
The SECURE 2.0 Act changes the rules a little bit for someone who is in the middle of retirement planning and wants to help pay for a child’s education using a 529 plan. For many, funding one of these accounts is a very proud moment – and it should be.
We’re going to explain what 529 plans to Roth IRAsmean and how they work together.
What are 529 Plans?
A 529 plan is known as a college savings account, but it can also be used for private school. What you do is fund this account and then when you need to use money for qualified education expenses, the withdrawals are tax-free.
What’s advantageous about withdrawals being tax-free?
A 529 is an investment account, so if you put away money early enough and compound interest adds up over time, you don’t need to worry about capital gains. The entirety of the growth is tax-free, with the caveat that the money be used for qualifying educational purposes.
Who Should Setup a 529?
A 529 account is very flexible. You can:
Set the account up for your grandchild
Allow the parents to set the account up
Choose the right setup option for you from a convenience perspective. You can have your parents and in-laws deposit money into the 529 account, and trust me, every little bit counts.
It may be easier to have one 529 account, but if you do want to be the owner of the account, you can do that, too.
If you have two grandchildren or children and one doesn’t go to school, you can transfer the account to another beneficiary. Money that comes out of the account for non-educational purposes will lose the tax benefits of the account.
2024 Ruling on 529 Accounts
Prior to the new ruling under the SECURE 2.0 Act, you had to worry about how much you funded the account because you could wind up with this scenario:
You fund a four-year tuition, BUT
The beneficiary goes to a two-year school
Since there would be excess funds in the account, they would be taxable when withdrawn from the account.
Under the new rule, you can roll unused 529 money into a Roth IRA.
You can roll a certain amount of money into a Roth IRA for the beneficiary. The keyword here is a certain amount of money.
For example, you cannot put $100,000 into one of these accounts in hopes that you can circumvent the law and roll it into the beneficiary’s IRA.
Rules for the 529 Plans to Roth IRA Accounts
While you can convert the 529 to a Roth IRA, there are three main rules that make it more challenging than people think. Let’s go with the example that you have $100,000 in a 529 account for a beneficiary.
The beneficiary is 18 and uses just a portion of the funds.
Previously, you would have a penalty for taking the money out of the account for non-educational expenses. You can now convert this money into a Roth IRA account, but there are stipulations. Here are the requirements:
There’s a 15-year holding period, meaning that you must hold the account for 15 years before you can roll it into a Roth account.
There are annual limits for an IRA or Roth conversion. For 2023, this figure was $6,500, so you could only convert up to this amount each year.
The total lifetime rollover amount from a 529 to an IRA is $35,000.
The ownership of the 529 to the Roth IRA must be the beneficiary of the 529 account. You cannot roll the money over into a Roth IRA for someone else if there are funds left in the account.
We expect greater clarification of these rules in the future, but as of right now, these are the rules.
Remember, to fund an IRA, you need to have earned income. If the child is to roll $6,500 per year from the 529 to the Roth IRA, they need to have an earned income of $6,500.
Contextually, if you hold the 529 account for 15 years, the child is likely 20 and may have a part-time job where they already have the earned income necessary to convert their account into a Roth IRA account.
It is also very likely that the caps will rise.
Fund the 529 Account with the approach that the child may go to school or may have scholarships that cover the cost of education. We recommend funding these accounts, but it’s important to keep these points in mind so that you don’t over-fund the account.
We recommend that your child opens a Roth IRA as early as they can so that they can grow their money tax-free. Even if the child has a job as a teenager, they can open up their own Roth IRA.
Opening the Roth as soon as possible allows the money in the account to continue growing tax-free.
Since these rollovers are brand-new, we’ll be getting clarification of the rules as time goes on. Even if you put just $100 a month into one of these accounts, it adds up over the course of 15 years.
