Got an email from a lady in near panic…
…Because her CPA basically laughed at her when she asked if she could retire. CPA said essentially “not even close” because she only had $650k set aside. (Video is here, by the way.)
To say the least, this lady was despondent and shattered. Her dreams of retirement, taken away, just like that.
This CPA obviously had no bedside manners. But worst of all, this guy has no clue what he’s talking about. Turns out the lady can live just fine on around $4k a month. In New Jersey!
What’s the biggest expense in New Jersey? If you said property taxes you win the prize. Property taxes will destroy you in NJ. So even having your mortgage paid off isn’t a panacea there. This lady knows that, of course. And thus her own conclusion was that $4k a month would be just fine as retirement income.
The CPA NEVER asked that though! He never asked what THE most important question in all financial planning is… How Much Do You Need?
Yet, he went spouting off about her inability to retire on “just” $650k. Pardon my French but What The Hell Is That???
And it’s no wonder why people are hesitant to hire “professionals” I would be too if they made me feel like crap. The only pro I want to make me feel like crap is the guy who cleans out our septic tank every few years. But for a white collar “pro” to flippantly say “no way” when asked if I could retire, WITHOUT even knowing my situation, is absolutely the wrong answer.
Let’s take this from the top, shall we?
Say the lady made $50k a year (adjusted for inflation) over the course of her top 35 years. (Anyone want to guess why I’m using the top 35 years?) Her Averaged Indexed Monthly Earnings (AIME) would be $4166.
GIven her AIME we can quickly calculate her PIA, which would be:
*** The first $926 * .90 = $833
*** $4166 – $926 * .32 = $1,036
$1036 + $833 = $1,869.
So, at her Full Retirement Age, we’ll say 66, her Social Security benefit will be $1,869 a month or $22,500 a year. Does she really need the $50k a year to live on in retirement, that she was living on before, given that FICA, Fed/state taxes, and her 401k contributions will stop? Probably not.
But, just to err on the cautious side, let’s say she does. $22,500 comes from Social Security. Where does the other $27,500 come from?
Her portfolio! $650k * .05 = $32,500. She takes 5% a year from her portfolio, if she wants, really without blinking an eye, and she will have well more income than she needs.
Done and done.
“But Josh… Don’t you know the 4% rule???”” Some folks will ask, accusingly…
Yes, I do. And I don’t care. The 4% rule is based on so many idiosyncrasies that I don’t feel like getting into here because I have multiple times in past emails and videos.
Now, one MIGHT object by saying she will need to pay income tax in retirement.
Let’s run the numbers. Her Provisional Income is $43,750. This means only $12,787.5 of her Social Security benefit will be taxed. Add that to her $32,500 of 401k distributions and her AGI is $45,287.
Now, subtract her Standard Deduction and her taxable income is just above $31k. First, roughly, $10k taxed at 10%, the other $21k taxed at 12%, she’ll pay around $3500 in taxes to the Feds, and hardly anything, IF anything, to the State of New Jersey.
So, even after tax, she’s well above net income wise where she was while working.
To wrap this up, the issue is that the CPA didn’t take the time to figure any of this out. He just used the old scare tactics of Suze Orman et al to assume everyone and their mom needs MILLIONS to retire. MILLIONS, I tell ya, MILLIONS!!!
It’s absurd on its face and yet many people, like this lady, were heartbroken by hearing this “news”. Drives me crazy.
I have mentioned this book before and will continue to do so because it changed EVERYTHING for me… Spend Til The End by Larry Kotlikoff and Scott Burns. Get it now and stop the worry.