A couple came into my office a while back, about six years from retirement and two years from paying off their house. They were dead certain they needed 100% of their current income to stop working. Every dollar. What flipped it for them was sitting right there in their own budget, and it’s the same thing I see with families all over the Valley.
You Don’t Need to Replace Your Whole Paycheck
Most people believe they need to take home what they make in their working years once they retire. For most people that may not be the case. During our working years we’re paying for mortgages, putting a real toll on our vehicles, and using services more than we will in retirement. Somewhere between 60 and 70 cents on the dollar is generally what’s feasible, and with proper planning your actual expenses in retirement can drop dramatically.
When I was quoted recently on “The Secret to Boosting Your Social Security Check by 30 Percent“, I walked through the math the same way I do at my desk.
Back to that couple. We started talking about their mortgage and how much of their budget it actually was. Turned out it was roughly 35% of the whole thing. So I asked them a simple question: are you planning on continuing to pay the mortgage once it’s already paid off? Of course not. It’s no longer an expense. Which meant they didn’t need all the extra income they were earning to cover it. I showed them what that looked like with a compound interest calculator and lower withdrawals, and here’s where it got real. The difference came out to a 10-year comfortable retirement versus a 30-plus-year comfortable retirement. Same people. Same savings. The lower draws and the bigger share of guaranteed income did that.
The Mortgage Isn’t Just an Expense, It’s a Tax Problem
The mortgage ends up being the biggest launching pad for people to feel confident about retirement, and it gets amplified with tax savings. When you don’t have that payment, it keeps you from pulling extra taxable money out of your 401(k) or IRA at higher rates, which leaves more of it tax-deferred and compounding.
I had another client who wanted to delay retirement, not because he couldn’t afford it, but because he was scared of his tax rate. Getting back up to his old income level meant a chunk of his withdrawals would land in the 22% bracket instead of the 10 or 12. I showed him that without the mortgage, he didn’t need to pull those extra dollars in the first place. The bracket he was afraid of was mostly a function of the payment he was about to lose.
Social Security Was Never Built to Carry You
People tell me all the time that Social Security covers everybody. So I ask them: if it’s meant to cover everybody, how close is it going to come to covering your specific needs? Usually the answer is “not very likely.” Social Security is there for the basics: basic housing, basic food, basic utilities, and often nothing past that. Same story with Medicare. It handles basic health needs but falls short on the more advanced treatment and care, which is why you build a plan around your own medical picture instead of assuming it’s covered.
A lot of folks believe Social Security will carry them because they paid into it for decades. That belief falls apart fast when two things land: inflation can swallow it up, and a lot of people don’t realize their benefits can be taxed depending on their income, up to 85% of them. That conversation usually makes people angry, because nobody told them until they were almost standing in it.
The $250 Habit That Could Be Worth Six Figures
Quitting a smoking habit is one of the clearest two-for-ones in the whole plan, and it comes up with clients more than you’d think. I had one who was already on the fence about quitting and frustrated that his life insurance rates were so high. So I showed him two things. One, quit for a full year straight and those rates could potentially come down a lot. Two, that same $250 a month he was burning could go into a Roth IRA instead. Over 20 years, at a historical average somewhere between 8 and 10%, $250 a month could grow to somewhere between $150,000 and $200,000. Tax-free in a Roth. Two wins, one decision.
Forget the Magic Number, Find Your Gap
When someone asks me what their number is, I don’t hand them a million-dollar figure off the TV. I like the 4% rule. Sit down and figure out your real retirement budget. Cut the things weighing it down, but leave yourself room to actually enjoy it, not just sit around doing nothing. Then take your monthly budget, subtract your Social Security, multiply by 12, and divide by 4%.
Say you’re planning on $3,000 a month and $1,500 of that comes from Social Security. That leaves $1,500 a month from your own savings, which is $18,000 a year. Divide that by 4% and you land at $450,000. That’s your target. Not two million. For a more conservative version, some people use a 3% rate and put a portion of their savings into fixed income to help support it.
The Bottom Line
Retirement is usually more affordable than people think, because the costs that eat your paycheck now, like the mortgage, the commute, and the higher tax bracket, tend to shrink or disappear. Figure out what your retirement actually costs, subtract what’s already guaranteed, and build toward that gap. The number’s almost always smaller than the one in your head.
Chris Walsh, Senior Advisor and Regional Director, Capital Choice Arizona, Phoenix, AZ
This article is provided for informational purposes only and should not be construed as legal, financial, tax, investment, or other professional advice. Examples and illustrations included are provided solely for illustrative purposes and are not intended to represent the experience of any particular client or predict future outcomes. Past results are not indicative of future performance, and there is no guarantee that prospective or current clients will achieve similar results. Capital Choice Arizona provides investment advisory services through CoreCap Advisors, LLC. Capital Choice Arizona and CoreCap Advisors, LLC are separate and unaffiliate entities.