A common guideline is that you should aim to replace 60-80% of your annual pre-retirement income. You can replace it using a combination of savings, investments, Social Security, and any other income sources (part-time work, a pension, rental income, etc.). The Social Security Administration website has a number of calculators to help you estimate your benefits.
It’s important to consider how your expenses will change in retirement. Some, like health care and travel, are likely to increase while some recurring expenditures will go down. You no longer need to dedicate a portion of your income to saving for retirement. You may have paid off your mortgage and other loans. However, you may wish to increase your traveling for the first few years of retirement and then start making gifts to family in later years. This may require you to aim to replace 100% or even 110% of pre-retirement income.
Regarding taxes in retirement, most retirees have been saving for years in their pre-tax 401(k) or 403(b) workplace retirement accounts. One benefit of these plans is that while contributing, you did not pay income tax on any of the income you deferred to your account. The downside to this is in retirement, you will have to pay tax at ordinary income tax rates.
The great news for most retirees is that their post-retirement tax brackets are typically lower than their tax brackets during their working years. This makes saving while working into a pre-tax account like a 401(k) or IRA a great option. However, if you have a substantial pension benefits or a large Required Minimum IRA Distribution, you could end up in a higher tax bracket post-retirement.
If you weren’t aware, pre-tax retirement accounts like 401(k)s and IRAs have an IRS mandate to begin taking distributions by age 72. These Required Minimum Distributions (RMDs) can be quite the surprise for folks that will not need the full distribution but will be required to take them anyway.
If this sounds like it could be you, there are a number of tax planning techniques that can be implemented to help lower your taxes in retirement. We recommend working with a financial planner that specializes in tax planning in conjunction with your tax professional to help you plan for future tax consequences.
Cash Flow Planning
A great place to start with determining how much you’ll need to retire is by creating a written cash flow plan.
The best place to start with determining your ability to retire is to create a detailed record of your required expenses. We like to break up these expenses into two main categories: living expenses and variable/periodic expenses.
Living expenses should be expenses that aren’t expected to change drastically on an annual basis and are required for your standard of living. Utilities, gas, groceries, and personal care are common examples of living expenses. Periodic/variable expenses are items you are planning to include in your spending, but may be more flexible in the amount you spend. Examples may include vacations, dining out, and other lifestyle spending. You would also want to include any future expenses such as roof replacement and vehicle purchases.
Once you have a clear list of your required monthly/annual expenses you will know what your income need will be in retirement. (Pro tip: the first time you create a cash flow plan, leave a bit of wiggle room as most people miss a few things)
Once you know how much income you’ll need, you can start creating a plan to strategically liquidate savings in retirement. This is where is gets a bit more tricky.
Many people are great at the initial creation of their cash flow plan but forget the silent killer of long-term planning: inflation. Inflation is defined as: “A general increase in prices and fall in the purchasing value of money.” In simple terms, a dollar today will not be able to purchase the same amount of goods as a dollar in the future as prices for goods increase over time. The average cost of a loaf of bread in 1990 was 75 cents whereas today it’s over three dollars.
General inflation has been about 2-3% on average over time. The cost of healthcare has increased higher than average inflation (typically 8.5%). The average cost of college has increased by 7%. Accounting for inflation is one big missing variable many folks planning retirement on their own often overlook.
We use a real rate of return in our clients’ Financial Plans so that we can accurately understand the purchasing power of future dollars. We use real rate of return by removing inflation from income and expenses (except for medical and college expenses) and the rate of return on investments.
For medical expenses, we assume a 5.5% inflation rate. For college costs we assume a 4% inflation rate. For your investments, we use a real rate of return of 4% (based on a 60% equity/40% fixed portfolio). This is an 7% rate of return – less an inflation rate of 3%. (The historical rate of return for stocks is 10% and bonds is 6%).
Once you have your cash flow plan and have accounted for inflation, you can now start to determine how much you will actually need for retirement.
In celebration of our 30 -year anniversary, we are also offering our Initial Financial Overview at a reduced cost of $300 (normally $775).This service is a personalized 2-hour review of your entire financial situation. From this meeting, we will provide you with specific recommendations in written form. Since we do not sell any products or accept commissions, our recommendations will always be objective and free from bias. Our ultimate goal is to help you get clarity on your current situation and provide you with steps on how to transition successfully and confidently into retirement.
If this sounds like something you would be interested in, or if you would like to schedule a complimentary introduction call, you can schedule a time using the link below:
Schedule an Appointment
In our latest video, Melanie Colwell gives a brief economic outlook and tips for stress management during this unprecedented time. One of the best strategies? Showing gratitude.
Thank you to our clients for your trust and confidence. Thank you to the essential business workers for ensuring our basic needs are met. Thank you to the medical providers for being our front-line heroes.
Another part of the CARES Act enacted the Paycheck Protection Program.
This program is offering loans to small businesses (less than 500 employees), sole-proprietors, and non-profits.
If funds are used for qualified payroll costs in the next 8 weeks, the loans can be forgiven. However, there are lot of details and caveats that Greg explains further in the below video.
Watch this video and then go talk to your bank as soon as possible!
The Coronavirus Aid, Relief, and Economic Security Act aka “CARES Act” was signed into law on March 27, 2020.
Individuals may be entitled to $1,200 checks ($2,400 for individuals filing a joint return) and $500 for each qualifying child under age 17 if certain income requirements are met. Did you know these checks are actually designed as a credit on your 2020 Tax Return?
Our video below discusses these checks in further detail.
The world is changing, and we changing with it. Introducing the Galecki Financial Management Video Blog Series! Kevin Chandler kicks us off with a introduction of the faces you’ll be seeing in the coming days and weeks.
The coronavirus epidemic has sent shockwaves through the American economy, as many investors already know. Still, with a little economic sense, investors should be able to maintain long term confidence in their portfolios and in the market. The United States economy was due for a recession; since 2009, the economy has rebounded to the tune of 121 consecutive months of GDP growth, a national record. With such large expansion, however, must come an eventual downfall (due to market overvaluation, inflationary output gaps, etc.). It has been nearly 11 years since the last recession in the United States. Recessions, on average, occur every 5 to 6 years. Long story short, a recession was on the horizon. The coronavirus epidemic caused the recession through fear. Consumer expenditures, based on popular economic belief, make up approximately 70% of total economic expenditures. When consumers are faced with outside influences, such as fear imposed by a deadly virus, spending habits change, and the economy is forced to shift accordingly. In the case of the coronavirus, fear decreased consumer expenditures. People are afraid to go out in public to eat, shop, etc. With the decrease in consumer expenditure, the economy was done in. However, the bright side of the economy’s current standing is this: the cause is known. In the 2008 financial crisis, the cause was not so easily identifiable. Some economists blamed it on market overvaluation while others blamed consumer confidence and the housing market. Knowing the problem makes finding a solution infinitely easier. The FED has already moved to halt the onset of a recession; similar action from the FED took much longer in the 2008 financial crisis. Ultimately, there is no system malfunction that is causing the current economic decline. The culprit is an outside invader, a virus that will be beaten by the United States medical system. Once the virus is gone, consumer confidence will return, and the economy will surge once again.
As COVID-19 takes hold of the world, investors need only remember one thing: patience is a virtue. The stock market will rebound; it always does. And portfolios will gain back their value after the recent bear market. Michael Wilson, Morgan Stanley’s chief US equity strategist, believes that the stock market will begin to recoup value in the near future and urges people to jump into the market. With cheap prices and nowhere but up to go, the stock market is primed for a rebound. With an influx of new investors, prices could begin to rise again in the near future. For investors who have lost large percentages of their portfolio value, now is not the time to sell. Remain patient and wait until the market upticks again, and maybe even look into investing more while the COVID-19 has prices so low.
The Bear Market is here. On Wednesday, March 11th, the DOW closed in Bear market territory. The S&P 500 is not far behind. This is defined as a decline of more than 20% from the peak. So, where do we go from here? What will happen to the economy and the market as we deal with the Coronavirus (COVID-19), an upcoming Presidential election, Brexit, and plummeting oil prices?
The quick answer is that nobody knows for sure on any of the above. Here is what we do know. We know that economies around the globe, including the U.S. will slow due to the fears surrounding COVID-19. Fewer people will travel, dine out, attend sporting events, and in general consume. This will inevitably cause consumer spending to slow, which will impact company revenues and earnings. Oil has dropped to nearly $30 per barrel as the demand will contract as fewer people fly and drive. But for how long?
If you cancel your spring break trip, will you not go later in the summer? If you don’t go to Lowe’s this weekend to buy a grill for the season, isn’t it probable that you will eventually buy one? Your demand and desire for traveling, a grill, and the latest tech gadget is still there, but the logistics of attaining those items has become complicated.
The initial drop in consumer demand will impact the economy in the near term. It is possible that we enter a recession in the U.S. over the next few months. It is important to remember that an average recession lasts 9 months and we have not had one for almost 11 years. They typically occur every five years, so we are overdue.
As for the market, equities have pulled back in very quick fashion in anticipation of this economic slowdown and recession in earnings that will inherently arrive. The average contraction for the S&P 500 is around 30% leading up to an economic recession. Therefore, given the already realized 20% pullback, it is possible that a good portion of the correction has already occurred.
If you have been to our office for a meeting in the last 4-6 months, you are aware that we have been warning clients that a pullback in the market was inevitable given valuations. In fact, we spent a lot of time in 2019 trying to reduce risk in the portfolio. We shifted to a more conservative bond allocation and we changed some of our equity allocation. So far, the changes have been effective in minimizing the downside correction that we are experiencing. We are still long-term investors and believe in ignoring the short-term market fluctuations. We don’t know what the next few weeks will bring for the markets, but we know that a diversified portfolio is the best way for clients to stay ahead of inflation, while minimizing risk, over the long-term.
The average investor has earned a 1.9% annualized return over the last 20-years. A 60% Equity 40% Bond portfolio has earned 5.2%. The average investor makes emotional decisions leading them to buy and sell at the wrong time. Keep the focus on making sure that your investment allocation is in line with your financial plan, so that you can achieve your long-term goals.
Liz Ann Sonders (Chief Market Strategist for Schwab) said the following in a letter this week to advisors: “Panic is not an investment strategy.” We agree and encourage remaining steadfast in your long-term strategy with a diversified portfolio.
Galecki Financial Management Investment Committee
Don’t have a budget? Think again… Have you ever taken a step back to look at your bank accounts and realized that you feel stuck? A budget can fix that. Many Americans find themselves stuck with big homes, big, new cars, and big debts. A budget can solve all of these issues. By looking at what you can spend less on, more money can be freed up for paying off debts, saving for the future, and even into accounts that can be used for vacations or other fun things. By following a few simple tactics for budgeting, your life financial life can be turned in the right direction. 08.15.19
Most people remember the 2017 data breach that happened to Equifax – If you don’t, you were probably affected. Over 147 million people had their information compromised during that breach. Well, there was a settlement announced last week and there may not be much to get from the settlement. Equifax was required to pay $700 million in the settlement and each person could have received $125 to do with what they wanted. Well, if you do the quick math, $700 million divided by 147 million affected people equals about $5 per person, not the $125 stated in the claim. With the already enormous amounts of claims filed, the recommendation is to take the free credit monitoring service as an alternative. You will be entitled to 4 years of free credit monitoring and identity protection. 08.02.19