Locally based CPA firm since 1956

Are you saving enough?

With tax day approaching rapidly, folks tend to look for ways to reduce their tax burden. Perhaps the most important and easily accessible method to reduce taxes is to contribute to your retirement plan. We understand that for quite a few folks, the ROTH IRA is the best option and does not reduce your tax burden. For those folks that do not have access to an employer sponsored plan such as a 401k and that do contribute to a ROTH IRA, the information below is for you too!

Retirement challenges are significant and getting knocked of course seems to more prevalent than ever these days. Companies no longer offer pension plans, kids are living at home longer, college costs more, and then there are other common ‘derailers’ such as divorce. The generally accepted target amount for retirement is 75% – 80% of your current gross income.

For purposes of this blog let’s call this our target income (t.i.). Now Social Security will cover a portion of your t.i. and you can go to www.ssa.gov/estimator to obtain your personalized estimate of how much to expect. So, take your t.i. less your estimated social security income and Wala, you now have a target amount of income that you are responsible to provide from retirement savings. This income need is an important number in our calculation below to tell you if you’re saving enough. We will walk you through some simple calculations to help you determine if you are on track to save enough, we will call this your retirement nest egg.

But first, I want to mention a couple of short comings in our calculation: 1) you may intend to have income from a job or business in your silver years, we are not accounting for that. 2) You may sell your home and purchase a less expensive home to pocket the difference. You may sell a farm, ranch, or business as you reach your sunset years. These liquidity events are not accounted for in our calculations.

Here is how to calculate and estimate your retirement readiness:

(If married, be sure to account for your spouse’s income, savings, and social security projections to calculate total household needs)

  1. Divide your monthly income needs by 1,000 and multiply it by the amount in table 1. This establishes your necessary Retirement Target amount.
    1. Multiply your current account balance by the factor in table 2. (This is your total of all savings set aside for retirement purposes)
  2. Multiply your monthly contributions by the factor in table 3.
  3. Add your answers in step 2 and 3 together; this is your projected savings.

If step 4 figure is larger than step 1, congratulations! You’re on track.

If step 4 is smaller than step 1, you need to make some changes.

Table 1: dollar values needed to produce $1,000 per month; (assumes 3% annual inflation)

 

Years in Retirement
Rate of Return 5 10 15 20 25 30 35
2% $60,000 $123,000 $189,000 $259,000 $331,000 $408,000 $488,000
4% $57,000 $111,000 $162,000 $211,000 $258,000 $302,000 $344,000
6% $54,000 $100,000 $140,000 $175,000 $205,000 $231,000 $254,000
8% $51,000 $91,000 $122,000 $147,000 $167,000 $182,000 $194,000
10% $48,000 $83,000 $108,000 $125,000 $138,000 $148,000 $154,000

 

Table 2: current balance factor

 

Rate of Return
Time to Retire 4% 6% 8% 10%
5 Years 1.22 1.34 1.47 1.61
10 Years 1.48 1.79 2.16 2.60
15 Years 1.80 2.34 3.17 4.18
20 Years 2.19 3.21 4.66 6.73

 

Table 3: monthly contribution factor

 

Rate of Return
Time to Retire 4% 6% 8% 10%
5 Years 66.52 70.11 73.97 78.08
10 Years 147.74 164.70 184.17 206.55
15 Years 246.91 292.27 348.35 417.92
20 Years 368.00 464.35 592.95 765.70

 

Example: Is Kate saving enough?

Step 1: Kate plans to retire in 10 years and wants her plan to extend to age 90. She estimates that she’ll need $2,500 per month from her savings and she assumes an average 6% return on her investments. Kate looks at table 1 and finds where the 25 years & 6% intersect; $205,000. That is how much she’ll need to produce $1,000 per month of retirement income. But because she needs $2,500 a month, she divides $2,500 by $1,000 and comes up with a factor of 2.5. Then she calculates her Target Nest Egg Amount: $205,000 x 2.5 = $512,500.

Step 2: Table 2 will help you calculate the future value of your existing investments. Kate has $250,000 in savings. With 10 years to go before retiring and an assumed rate of return of 6%. Kate’s factor from table 2 is 179. When she multiplies her current balance of $250,000 by 1.79, the future value of her account at retirement is $447,500.

Step 3: Table 3 shows the future value of your ongoing monthly contribution. Kate is also saving $500 per month and assumes her savings will earn 65 over the next ten years. The future value of her monthly contribution is $82,350 ($500×164.70=$82,350).

Step 4: Using Kate’s example, her projected savings are step 2 ($447,500) + step 3 ($82,350) = $529,850. That’s more than her Target Nest Egg Amount, so Kate is on track and saving enough.

We believe each person is unique to their family and we believe we can help you create a personalized plan. One of our core values here at WCM is to Improve Ourselves Every Day. We want to help you improve yourself by helping you create a plan, inventory where you are with regard to that plan, and help you get on track.

We have a Certified Financial Planner, several CPAs, and Investment folks that can help you create and execute a plan. Let us meet with you to help you improve your financial health.

Check out my monthly marketwatch blog at: https://wcmtexas.com/marketwatch

Have a question? Let me know! Email me at kcompton@wcmtexas.com.