Retirement Planning: Step 1 – How Much Money?

Step 1 in retirement planning seems easy and straight forward but it can be a little complicated, especially if you have changed jobs, industries and types of employers. The goal of step 1 is to identify ALL the buckets of money you have in retirement accounts (tax deferred), bank and brokerage accounts (taxable) and accounts where there is no taxation (tax free).

Retirement Accounts (Tax Deferred)

There are many different types of retirement accounts.

• 401 (k). – Usually done through a for profit employer.
• Solo 401 (k). – If you own your own business (with no employees) then you can create your own 401k.
• 403 (b). – Usually a retirement plan for people working for non-profit tax exempt entities.
• 457 (b). – Usually a retirement plan for government employees.
• IRA. – A retirement account for earned income.
• Self-directed IRA. – A retirement account for specialized investments such as real estate or art work.
• SIMPLE IRA. – A retirement account for small businesses with less than 100 employees.
• SEP IRA. – A simplified employment retirement plan for small businesses.

Retirement Accounts (Tax Free)

• Roth IRA. – A tax free (withdrawals) retirement account for earned income.
• Roth 401k. – A tax free (withdrawals) retirement account (usually through employer).

Each of these plans has a variety of rules and in some instances money can be moved from one account to another sometimes with or without tax consequences. The first step is building a list of all of these types of accounts that you have and figuring out how much money is in each one, the investments they hold and a projection of how much they might be worth during retirement.

Bank, Brokerage and Other Accounts (Taxable)

• Banks
• Credit Unions
• Brokerages
• Treasury Direct
• Employer Deferred Income

The accounts highlighted in bold are ones that I have at the moment and building a spreadsheet of all of these accounts has been quite a chore but it’s needed to understand how much money you have now, will have in the future and how much can be drawn down during retirement.

Generally speaking, conventional wisdom says you should never draw down more than 4% of your retirement income so if you have $500,000 saved then you should not spend more than $20,000 of that money in any given year.

The premise here is that if you have $500,000 on Jan 1, you withdraw $20,000 for the year which leaves $480,000 balance in your retirement account and $20,000 in your checking account to spend. Hopefully by Dec 31, your $480,000 balance will have earned at least 5% return to “fill” it back up to $504,000 so that on January 1 of the following year you can withdraw another 4% and repeat the process.

Of course, in retirement, I expect to be spending money from my retirement accounts but also social security, my taxable accounts, and my rental properties to name a few things.

Theoretically, how does someone minimize taxes if they are collecting $20,000 from an IRA, $40,000 from social security, $30,000 from rental properties, and $10,000 from dividends? What are the possible tax brackets? What are the possible standard deductions? How will I know where I land?

The answer to all those questions is a journey we’re about to go on. Click here for Step 2.