Retirement Planning – When $60,000 Equals $100,000

Retirement Planning

Plan your retirement income

What if I told you that in retirement, $60,000 of income could be factually equivalent to your $100,000 W2?  Would you believe me?  Would you want to know more?

Well you should.

Because it’s very possible.  It’s possible that a retirement income of $60,000 can be equal to a pre-retirement W2 of $100,000.

How?  I hear the masses asking. How is that possible? It’s quite simple. Before you receive your $100,000, income taxes, payroll taxes, state taxes, and other employee benefits are all deducted from your gross income. The amount that you receive after these deductions is the amount that really matters, as this is the amount you should have available to spend.

The question is, how do you know how much money is available to spend?

The easiest way is to complete a simple tax and budget analysis to determine how much you have available.

I Make $100,000. How Much Do I Have to Spend?

Let’s assume that you’re working and making $100,000 per year. As we just discussed, this doesn’t mean that you have $100,000 to spend. Income taxes, wage taxes, 401(k) deferrals, and other benefit deductions are all subtracted from your $100,000 before you receive anything.

For example, it’s not uncommon for someone making $100,000 to have the following deductions:

Total Income $100,000
FICA/Medicare Tax $7,650
Federal Income Tax $7,991
PA State and Local Tax $4,070
401(k) Deferral $18,000
Net Income (Spendable Income) $62,289

This simple math suggests that an employee earning $100,000 per year has an annual spendable income of $60,000, or approximately $5,000 per month. Now do you see how quickly $100,000 turns into $60,000?!

Taxes and Post-Retirement Income Planning

While you may not be thrilled to learn that $40,000 (or 40%) of your total income is disappearing before you even receive it, you’ll be happy to know you have a starting point for planning your retirement income. If you live off of $60,000 pre-retirement, it’s reasonable to assume that you can live off the same $60,000 in retirement.

You’ll also be happy to hear that income taxes are typically much lower in retirement. Payroll tax will be a thing of the past. Furthermore, your social security income, depending on how much total income you have, may or may not be taxed. You will no longer be contributing to a 401(k) plan. In Pennsylvania, for example, distributions from pensions and IRAs are non-taxable. All these changes significantly lower the amount of total income needed in order to re-create the same $60,000.

If you need to replace the $60,000 of spendable need calculated above, then a cash flow and tax return analysis could look something like this:

Social Security Income $23,000
Pension/IRA Distributions $40,000
Federal Income Tax $3,544
PA State and Local Tax $0
401(k) Deferral $0
Net Income (Spendable Income) $59,546

When $60,000 Equals $100,000

As you can see, $100,000 while you’re working may be comparable to approximately $60,000 during retirement!

It’s critical for pre-retired individuals and retirees to understand this concept before pulling the trigger on retirement. If you don’t, you may find yourself working significantly longer than you want to in a miscalculated effort to save “enough.”

This type of tax analysis goes well beyond the “rule of thumb” and the typical industry benchmarks that so many retirees rely on for sound advice.

Tax services are not offered through, or supervised by, Lincoln Investment.  None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.

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2 Responses to Retirement Planning – When $60,000 Equals $100,000

  1. Warren Withoft July 23, 2017 at 10:04 am #

    Yes..finally someone publishes the truth and defunks the 80% rule Financial planners push. Another way to determine this is look at your year-end W2.

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