Robert DickinsonBob Dickinson graduated from New Mexico State University in Las Cruces, NM. His Bachelor degree in science was to be his entry ticket to the Air Force Research Laboratory at Brooksfield AF Base. At that time the Air Force had a more pressing need for pilots in Viet Nam so Bob graduated from pilot training at Laredo AFB, Laredo, TX in late 1969 and was deployed to Viet Nam as a forward air controller in 1970. Upon his return from Viet Nam he served as Pilot and Wing Flying Safety officer for the Air Force Eastern Test Range. Bob then when to seminary and served as a pastor to 7 different United Methodist churches over the next 26 years. Bob and his wife Susie own and operate 3 home based businesses. Chrisara Enterprises is their internet information marketing business. The second business offers financial services to other businesses and the third holds investment properties in various states.Interests and Hobbies: Retire Well for Less Than You Think By Chuck Saletta
Assume you have a $50,000 annual salary. On top of that, your employer may provide you with a voluntary and mandatory benefits package valued at 40% of your salary -- another $20,000. To retire and not lose ground, it would appear as though you'd need to cover a $70,000 gap. With a 4% inflation-adjusted safe withdrawal rate from your investments to not outlive them, it looks like you'd need a nest egg of $1.75 million to fund your retirement. Cut the Overhead
Then, there are your vacation time and company holidays. For a retiree, every day is a vacation day. Assuming you get 10 days of vacation and 10 company holidays a year, that's 20 paid days off out of about 260 potential working days. That's another $3,846 worth of your benefits that you don't need to replace in retirement. If you get to the point where your assets -- rather than your job -- provide your income, you may no longer need life or disability insurance, either. After all, the purpose of those types of insurance is to cover your loved ones once your income goes away from an unforeseen event. If your family's income is not dependent on your labor, there's no real need to insure it. While those costs vary heavily based on your specific circumstances, we'll assume they run you around $2,009 a year. Right off the bat, we've reduced your annual salary needs by $21,005.
How Their Risky Investment Paid Off First, let's tackle Medicare. Remember that we started by assuming $20,000 worth of annual benefits -- including the mandatory ones -- from your employer. Thus far, we've accounted for about $10,171 of it. That leaves $9,829 on the table, most of which is probably your health insurance. With Medicare covering much of that cost, your responsibilities would be much lower. Let's assume you'd be responsible for an average of about $1,500 a year to cover a supplement, $1,062 a year to cover Part B, and $384 to cover Part D -- the new prescription plan. That's a $2,946-per-year cost to you -- some $6,883 less than we're estimating your employer pays for your existing plan. Now, let's look at Social Security. Your specific benefits will vary based on your earnings history, of course. For the sake of argument, let's assume the average benefit. According to this calculator, the average eligible retiree family receives about $1,056 a month, -- $12,672 a year -- from that program. Your Bottom Line Social Security and Medicare benefits knock your required annual income down by another $19,995, to a practically microscopic $29,000. That's nearly 60% below where we started. That knocks your total required balance at retirement from $1.75 million to $725,000, a far more achievable number. Don't forget, too, that we completely ignored any boosts you might get from having a completely paid-off mortgage or downsizing your home once you've raised your children. If you can benefit from these, too, your required income and nest egg shrink even further -- all without negatively affecting your lifestyle. The Bonus Round Plus, if you plan well for your retirement, you'll also be able to use the tax code to your advantage to knock that total down even further. Any qualified Roth IRA or Roth 401(k) distributions, for example, can be completely tax-free. Long-term capital gains and qualified dividend payments in a taxable account currently get a federal tax break, too. For instance, at this required income level we discussed, a taxpayer would likely at worst be in the 15% federal tax bracket. Current law puts the federal tax on capital gains and qualified dividends for people in that bracket at a microscopic 5%! With taxes that low, owning companies like these in a taxable account becomes that much more attractive:
These are all companies that pay strong dividends that could qualify for that low tax rate. With payouts that big relative to your 4% need, you could essentially use your dividend-paying stocks as a permanent ATM. If their dividends continue to grow over time as their businesses improve, you'll be able to cash the dividend checks to cover your needs and rely on the payment growth to fight inflation. Get Started Now Making the right moves now can set you up for a long and comfortable retirement later. The more complete and well thought out your plans, the more likely you'll be able to get by comfortably on less. At the time of publication, Fool contributor Chuck Saletta owned shares of Fifth Third Bank. Duke Energy is a Motley Fool Income Investor pick. The Fool has a disclosure policy. More retirement advice is also available from Rule Your Retirement, a Motley Fool publication.
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