Friday, December 23, 2011

Can you retire before 2013?

Can you retire before 2013?
Jeff Wuorio (MSN Money, December 23, 2011) 

Comment:  Not a bad article, but one that does demonstrate that when you plan for retirement, you need to pay attention to:

1) the tax treatment of various sources of income (and make sure that you treat them consistently), and
2) whether or not sources of income increase with inflation

In the example in the article, the author determines that the retiree will need $600,000 of taxable accumulated savings (like a 401k plan) to replace pre-retirement standard of living.  However, if we assume a 20% effective tax rate on all income sources, 3% inflation and a 5% return on assets, the net annual income target of $63,600 ($5,300 per month) becomes $79,500 before taxes and $59,100 after subtracting Social Security.  In order to generate annual real income of $59,100 per year for a 25 year period, the spreadsheet above indicates that the retiree would need to have about $830,000 in accumulated savings, not $600,000.