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When Can You Afford to Retire? By Christine D. Moriarty
Get a Pencil, Paper, and Your Tax Returns
Look at your recent Form 1040 tax return. It will show a complete income picture, beyond your salary, by including investment income, alimony, and annuity income. On line 9 will be the starting annual income number to use. On line 16, find the amount you have been paying in federal taxes. Find the state taxes you have been paying on your state form or your W-2 if you do not file a state income tax form. So, for now, deduct those amounts from your income. You still will pay taxes in retirement, although typically not as much. Find your annual savings. For retirement, these are on your W-2 or Schedule 1 of your 1040. If you save in a Roth or brokerage account, your annual statements will show that yearly total. Deduct all savings from the result in step #2. From your savings total in step #3, subtract any money in tax-deductible college savings accounts for your children or that will be used to pay off student loans, if they will be paid by the time you retire. Subtract from the result of step #4 any other large sums you spent for special events, such as a once-in-a-lifetime trip.
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“I want to know if I can retire,” Marie said, sitting down across from me. She was typical of many pre-retirees everywhere, trying to figure out when they could stop working. When I was a financial planner, many of my clients thought this was an easy question. Instead, they got the question they did not anticipate from me: How much are you going to spend annually in retirement?
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Understanding where your money goes today is critical to being prepared for your retirement years.
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If you are five to ten years from retirement, you can use your current spending less the large savings you accumulate as your starting point. With a calculator in hand along with recent tax forms, real estate bills and investment statements, you will have a good estimate of what you need.
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Understanding where your money goes today is critical to being prepared for your retirement years.
You now have a pretty good estimate of how much you spend annually, which is also called your outflow.
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NEXTAVENUE.ORG
OCTOBER 2022
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