The Number - Top Down

[Lagniappe]

A friend approached me last weekend about figuring out their number - in her words "how much we'll need in savings to live like we currently do"? When I asked how much they spend, she didn't know. A few more questions, though, and I was able to get the following info: Two earner couple in their mid 40's, no kids, in the SF Bay Area. They live on his income of $200,000 and save hers. His only savings are to max out his 401K. They rent their house, take public transportation to/ from work, and have no idea otherwise where their money goes. The best I could come up with based on this info was:

Gross Income $200K

Subtractions
401K - 15.5
Federal Taxes - 41.7
State Taxes - 12.6
SS - 6.2
Medicare - 2.4
Disability Insurance -1.0

Additions
Health Insurance + 10

Funds Needed (pre-tax) $130.6K
Avg Tax Rate 10%
Total Annual Distrib $143.66
W/drawal rate 4%
Nest Egg Reqd $3.6 Million

For some reason I could not get this to work in tabular form, so I apologize for the difficulty reading it.

Have I missed anything major here? My guesstimate on taxes is probably the weakest assumption in all of this - no idea if this is near correct at this level of portfolio, but it is what I use for my planning purposes.

This would mean they are halfway there, and would bring quite a few smiles.

 

[LOL!]

Perhaps the discussion was prompted by this commercial: YouTube - INGYourNumber's Channel

A simple calculator can be found at ingyournumber.com It came out a little on the high side versus FIRECalc: A different kind of retirement calculator for me.


The income taxes before retirement of $54K look extremely high to me. I would've guessed they would be in the $35K range based on personal experience.

 

[hankster]

That looks pretty close. My concern is that they don't seem to have a spending plan. They should understand where the dollars go and how to adjust if market conditions turned against them early in retirement.

 

[REWahoo]

Looks to me as if the 10% avg. tax rate is too low for an after tax income of $136k, assuming it was all from tax advantaged accounts. I'd say somewhere closer to 18-19% for fed taxes alone. This would result in an annual distribution of $168k to net $137k after taxes, which would require a nest egg of $4.2M. Add in state taxes and the number is probably in the $5M range...

 

[Lagniappe]

Looks to me as if the 10% avg. tax rate is too low for an after tax income of $136k, assuming it was all from tax advantaged accounts. I'd say somewhere closer to 18-19% for fed taxes alone. This would result in an annual distribution of $168k to net $137k after taxes, which would require a nest egg of $4.2M. Add in state taxes and the number is probably in the $5M range...

Thanks, REWahoo, I thought this might be low, but most of their savings are not in tax advantaged accounts, they'll be selling assets in taxable accounts and paying taxes on the realized capital gains.

 

[aenlighten]

Live like they do

The biggest question is whether they really want to live like they do. Does renting mean they are waiting for a buying opportunity or they plan on moving elsewhere? Buying is initially much more expensive, but long term rents will rise faster than incomes there. Will their expenses change in the future? Hobbies? Travel? Vacation home?