Retire Now – Save 20 to 25%
HAVE YOU EVER HEARD SOMEONE SAY THEY MAKE MORE MONEY IN RETIREMENT THAN THEY DID WORKING? I have – many times. While it’s not common, it happens. How so? Who are these lucky people?
FOR SOME, IT’S NOT ACCURATE TO SAY THEY MAKE MORE MONEY. They just have more take home pay as a retiree. This occurs because when they retire some of their costs immediately disappear. These three can represent important cost savings for retirees:
1) FICA. This is social security (which might be labeled as OASDI on your paycheck). When you’re working and have EARNED income, you pay social security. It is 7.65% of your income up to $118,500. Income over $118,500 is taxed at 1.45%. In retirement, you don’t pay this unless you work and have earned income. As such, you immediately save 7.65% off of what you were paying for Social Security.
2) SAVINGS. Many people save money for their retirement. If you are saving for retirement in your company 403b, 401k, or your own IRA, when you retire, well, you no longer need to save for retirement (unless you just want to save for your future and still have extra money each month). Many people are actually saving quite a bit for their retirement so this is a big cost reduction. Some save 15% or more and also contribute to other accounts. The overall savings rate can range quite a bit, but 10% is a good number to use.
3) TAXES. Many retirees will have lower reportable income in retirement. Their social security income may not be taxable. If it is, they will only pay taxes on 50 or 85% of it. See this article on Kiplinger for a more detailed explanation. Also, since retirees generally have less income they typically pay less in taxes. A conservative estimate would be a 5% savings.
THESE THREE “WORKING COSTS” ADD UP TO A SAVINGS FOR RETIREES OF 22.65% – RIGHT OFF THE BAT. Not bad! For some it will be more and others less. These examples may not apply to any specific individual and this is certainly not a recommendation to quit your job today. Also, there may be many other factors which impact your retirement costs and income differently and offset these savings.
THE POINT IS THAT FOR SOME PROSPECTIVE RETIREES THERE IS GOOD NEWS. If this is your situation, retirement may not be as daunting as you imagine. Running the numbers may show that you are closer than you think.