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Neighbors of Kane County

A secure retirement— and a Reality Check to make it work

Oct 25, 2016 09:18AM ● By Neighbors Magazines

The key to a secure retirement includes two elements, Income and Expenses. The first challenge is to determine the amount of income coming into the household at retirement.

Let’s start with any pensions a married couple may have, followed by Social Security, any guaranteed life income annuities, etc.

Now we look at what they have saved during their working years through 401ks, 403bs or any other tax deferred payroll savings plans they had at their disposal. This is called qualified money. It qualifies for tax deductible and tax deferred status during the accumulation period. Let’s say this particular pot of money is $300,000.

In addition this couple also accumulated another $300,000 by investing as well as an inheritance. This would be called non-qualified money and actually has more value (buying power) than the qualified $300,000 because the qualified money is taxed as ordinary income based on distributions while the non-qualified money does not carry the same heavier tax burden…So the total of these two pots of money = $600,000.

Let’s summarize our monthly income and Federal taxation. Pension = $1,000 fully taxable, Social Security $2,000 includes both husband and wife partially taxable, Annuity $1,000 some potential taxation, depends on type, qualified $300,000 (annual distribution rate of 3.5%) = $875 fully taxable, non-qualified $300,000 (annual distribution rate of 3.5%) = $875. Total income = $5,750 and overall estimated 15% Federal income tax of $862 = $4,888 net per month. It’s important to remember that a spousal death could alter the pension and will definitely reduce the Social Security by the smaller of the two benefits.

Now the expenses: They would be more readily adjustable. Here is a thought if you are one to five years from retirement. Establish what you believe to be your reasonable expenses during retirement. Let’s say you settle on net income needed of $4,000 per month...Now establish a plan to live on $4,000 net per month while you are still working. Here is an opportunity to test your formula. According to the above income example it should work.

However, there are some other considerations. In other words the Reality Check. Medical expenses and premiums. Inflation which erodes purchasing power, and life being life the purchase of a car, a new roof, appliances, travel to see the grandkids, etc. In other words, real life happenings.

My experience has been that it many cases (not all) it usually takes more income and assets in retirement than originally anticipated.

So what are some potential options?

• Reduce expenses through changing lifestyle spending habits.

• Reduce expenses through debt reduction, credit card payoffs, etc.

• Take part-time work.

• Balance investment portfolios to reflect your needs. If the need is income let the portfolio reflect that need, according to your comfort zone.

• Increase the distribution rate on the investment portfolios but that could add risk for depleting the portfolio in the future. However each situation is different.

• Delay retirement, which can sometimes increase the pension benefit and the Social Security benefits.

• There are Reverse Mortgages but one has to be careful and fully understand the contract. Professional guidance should be sought from a third party.

• Downsize your home to something or somewhere less expensive. (See below)


Evaluate yourself by your own standards, not by somebody else’s

                H. Jackson Brown Jr.

John Masus CLU, ChFC, CFP is an LPL registered principal with clients in 24 states. Securities offered through LPL financial, Member FINRA/SIPC. Masus Financial Group, Ltd. is a registered investment advisor, a separate entity from LPL Financial. You can email we have been located in downtown Batavia for over 23 years.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Past performance is not indicative of future results.