4 Comments

1. 

   The Opinion Sports Show on October 31, 2022 at 3:06 pm

   According to that guy on IG Jeremy or IG page personal finance club he tells his followers all they need to do is save $300 a month in a S&P index fund and they will have 3 million in retirement lol.

2. 

   Planman 4x4 on October 31, 2022 at 3:06 pm

   This is a disappointing misrepresentation of peoples’ actual experiences and fact patterns.

   First, most people eventually buy their residence. Often, about 25% of their income goes to the principal and interest payments on their mortgage, and if they pay off their mortgage by retirement, that means they need less retirement income.

   Second, for a person who earns about $50,000, the present value of their future, age 67 Social Security is about 46% of their income. If they delay collecting benefits to their age 70, their benefit is about 57% of their income. While it is true that there is a funding problem for Social Security in that without changes, it will only cover about 78% of scheduled benefits, the government is not going to suddenly stop collecting Social Security taxes, which means that there will always be funding to the system and some form of benefit. With fixes to Social Security funding, the lower middle class that earns the equivalent of about $50,000 per year is among the least likely to see a cut in their benefits due to the fact that politicians recognize this is the largest voting block.

   Third, income taxes go down in retirement for someone in this income range

   With their mortgage paid off reducing needs by 25%, and Social Security covering 46-56%, the worker only needs to save enough to cover 18-29% of their $50,000 standard of living if they retire to straight leisure and do not work part-time during any of their retirement.

   This means that to cover a similar standard of living, they would need between $9,000 and $14,500 in present value in taxable distributions from their qualified funds.

   The present value Standard Deduction for Federal Income tax purposes for someone age 65+ is pretty close to $14,500. At these Social Security benefit levels and taxable distribution from qualified funds levels, that puts a single tax filer at having 0% of their Social Security benefit subject to income taxes. So, this hypothetical $50,000 present value income earner would pay no Federal Income taxes—further reducing the person’s cash flow needs.

   There are other dynamics at play too. During the person’s working years, they pay 7.65% of their wages into the Social Security and Medicare systems, but in retirement, they don’t pay that. Technically, I’d call this a wash through because that equivalent present value of $3,825 annually tends to go towards paying for Medicare Part B and a Medicare supplement or Advantage plan.

   Fourth, if this hypothetical person invests 10% of their income for retirement—not even including their employer match—this means that their present value standard of living is 10% lower. So, instead of needing 18%-29% to cover their shortfall, they will need 8-19% to cover their standard of living. So, reduce the $3m figure to somewhere between about $250k to $600k.

   If a worker earning $50,000 per year allocates 10% of their income to a qualified account, deferring income taxes until they retire, and then in retirement, they distribute it at a level where their Social Security is not subject to taxes, and their annual qualified plan distributions are close to or less than the Standard Deduction, they are deferring taxes on money upon which they won’t pay taxes in retirement unless they pull out larger distributions than are needed for the standard of living a person has at $50,000 per year present value.

   A person investing $5,000 per year pre-tax for 30+ years should be able to accumulate a future value of $250,000 to $600,000—particularly because as their income increases with inflation, their contributions increase over time too. So, if at 3% inflation, $50,000 ends up with a future value of $120k, their 10% of income retirement plan contribution would end up as $12k in that future year. A flat, not increasing $433 in monthly contributions for 360 months, at an 8% return, results in a future value of almost $650k. At 6%, the future value is about $437k. With increasing contribution levels as income grows with inflation, and investing based upon a very long term time horizon, a person with this hypothetical income should be able to accumulate enough to retire at a similar standard of living.

   I appreciate your content, and I also believe IUL will not remotely do what it is promoted to be able to do. I am a believer in heavily funded, limited pay, with paid up additions rider premiums added, whole life with participating policies from mutual life insurance companies because it allows policy owners to earn rates based upon intermediate to long term portfolio assets with the insurance company, while having very short term liquidity and guarantees. I view those kinds of policies as nearly risk free, buffer assets—not as a source of future periodic income, but as a buffer/reserve to be able to navigate significant market downturns, personal financial distress from job losses or illnesses, and/or as an opportunity fund for when others have a liquidity pinch like what happened in the Financial Crisis.

   However, please consider visiting with advisors who are experienced and credentialed who work with clients during the actual distribution phase of retirement and help people navigate Social Security claiming strategies, qualified distribution strategies, how to navigate the ACA tax credit for health insurance when clients retire before Medicare eligibility, etc.

3. 

   Vernon Sublett on October 31, 2022 at 3:06 pm

   I'm confused. He didn't appear to account for growth in the retirement account. Isn't the average return in the S&P like 7-10% per year? Maybe I'm crazy, but I feel something is missing.

4. 

   Jus Rarsh on October 31, 2022 at 3:06 pm

   True