Your Money


by Andy Gagnon, Ameriprise Financial

Are you on a financial savings track to reach your retirement goals?  How do you know if you will have “enough”?  Do you have the right balance of pre-tax and after tax (Roth) savings in your portfolio?  I’d like to provide some insight into all three of these big questions that many retirement savers ask.

Reaching Your Goals

Start by asking yourself what kind of lifestyle you desire in retirement. To reach your retirement goal, you need to begin with the end in mind.  Sit down with your spouse, take some time to visualize what your retirement may look like and then start with the numbers. Pre-retirees who do this simple exercise will reap the rewards of doing so for years to come.  Will my spouse or I be working part time, launching a small business that seconds as a hobby or relying on social security and investments or pension for our entire income?  Do we plan to buy a second home or cabin or are we downsizing to a townhome or apartment? What kind of legacy do I want to leave to children and charities?  Once these questions are answered quantitative goals can be set and steps can be taken to achieve these goals.

Will You Have “Enough”?

Typically, retirees need approximately 60-80% of their pre-retirement income to satisfy their retirement income needs.  Let’s take the example of a household making $120,000 annually in their pre-retirement years.  At retirement this household will need $84,000 annually to live the lifestyle they desire.  Say $40,000/year comes from social security and pension benefits.  The remaining annual income will have to come from your retirement savings, $44,000 annually.  To calculate your total retirement savings need we have to make a couple assumptions.  We are assuming you and your spouse will be in retirement for 30 years, to age 90-95.  We also assume that your retirement savings is averaging a 5% rate of return.  For this example, total savings upon retirement would need to be $683,000 to generate enough retirement income to last for 30 years to ensure the lifestyle you want to live. Examples used are “gross taxable income”.

Save Using Pre-tax or After-tax Dollars?

This is as important a question as any when planning how to save tax-efficiently.  It really starts with your current annual taxable income.  If you are in a high tax bracket, say the 28% federal marginal bracket during your pre-retirement earning years, it would make sense to save more using pre-tax dollars, in other words you could defer taxation of your savings to your retirement years where you could be taxed at a lower rate, say mostly in the 15% federal marginal bracket.  However, consider saving using some after-tax dollars as well, such as using a Roth IRA or a Roth 401(k).  By doing so, you are allowing yourself to have greater flexibility when you take income in retirement.  For example, if you would like an extra $20,000 in income for a dream vacation, a remodel, or to help the grandkids you can take it from your Roth account in retirement and it would be totally tax free, not pushing you into a higher tax bracket.  

This article is not intended to provide specific legal, tax, or other professional advice. For specific professional assistance, consult appropriate professionals.