This reader story comes from long-time reader and commenter Bill McFadin, aka Cybergeezer, who commented that he had submitted a story months ago that never ran. We asked if he would resubmit the article, which he kindly did. Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income.
I have been retired three and a half years, and my current income is more than I was earning on the job before I retired. How? Well …
I never made big money; I exceeded $50,000 in gross earnings in just one year, and that was only with some massive overtime. And when I looked at various retirement calculators, it was disheartening; I would have needed to save more than I made to have enough to live on, it appeared.
So instead of looking at how much I needed according to some unrealistic chart, I looked instead at what I was saving, projected that out to how much I would have saved by my retirement date and looked for ways to generate the highest income from that total.
Because of heavy saving in my 401(k), I was taking home less than I could have; but I had some additional income that would not be affected by leaving my job, as I explain below. The Social Security website showed me that, based on my age and the gross benefit minus withholding for Medicare Part B and income tax, I would net nearly what I was taking home from my employer.
There are plenty of rules of thumb out there on how much of your former income you need to replace in retirement. What have you read — 100 percent? 80 percent? More? Less?
I have detailed information on only one person who has crossed over from the working life to the leisure life, so let's use his (that would be my) numbers as an example.
My Plan — And My Assumptions
This is what I do. So if you decided to follow this for yourself, I assume that you would not be working at all in retirement. You wouldn't be generating any additional earned income or paying any Social Security taxes. I assume that you would have paid all debts by the time you retire, including your home mortgage. (You never really pay off your house because the taxes and insurance go on forever.)
The principal and interest portion of my house payment totaled 24 percent of my gross income while I was working. In addition, I was putting 25 percent of that same gross into my 401(k) savings. (Earlier, before a cutback in hours and income, I was able to put away 40 percent because, as a single man whose child support payments were long behind him, I had only one mouth to feed.) My Social Security tax, which would not be paid in retirement so long as I had no earned income, was 6.2 percent.
So, adding the house (24 percent), retirement savings (25 percent) and a tax I wouldn't pay without working (6.2 percent), I was putting a total of 55.2 percent of my gross income into things that I would not be paying in retirement, meaning I was living on 44.8 percent of my gross before income taxes and my employee health insurance was withheld. I have always felt that gross income is much less important than net and I am now netting, or taking home, more than I was while working, i.e., more than that 44.8 percent minus taxes.
Medicare, currently at $104.90 per month, is very close to what I was paying for health coverage at work as a single person. In retirement, I use a Medicare Advantage plan with no premium, so my health insurance costs are limited to the Medicare Part B payment. Co-pays so far have been the same as, or less than, what I paid while working. Income tax is harder to predict; but Social Security, as well as such things as dividends, interest and annuity payments, are reported to the IRS on a Form 1099. And, if you remember, one of the issues in the 2012 presidential election was that those of us in the “1099 economy” have a lower income tax rate than that paid by people whose earned income is reported on a W-2 form. In addition, I live in Florida where we have no state income tax.
For additional income — I know some people have a blind spot about this and simply turn off their minds when they read the word — I found some unique annuities. They are neither the standard fixed nor the variable variety, but have a set percentage of increased payments each year on the anniversary of their purchase. I currently have three, with 2 percent, 4 percent and 5 percent annual raises, plus a future annuity that begins paying in 2016. That one will have a 3 percent annual raise. As for those dreaded fees, each of the four annuities I have purchased had a one-time fee of about $325, a total of $1,300 (about one-half of 1 percent of the money I invested).
Some dislike annuities because we are in a low-interest period right now, but I didn't have 20 years to wait for rates to get a lot higher or even 10 years for them to get a little higher. At the present time, with the annuities already paying me, I am getting about 5.7 percent on my investment, much better than the 0.41 percent I earn, for instance, on the money market account that is holding my liquid funds.
While I think there must be other companies offering similar annuity products, these are the only ones I have found with this specific type of increase that is not tied to either the stock market or the rate of inflation. They are sold by New York Life.
I started the first two annuities in 2008, so I had some extra income to help fill the gap when my overtime was sliced and, later, my hours and base pay followed. At the time I retired, my Social Security plus annuities amounted to about 92 percent of the total income I was making while working. Today, my income before the annuity I added in 2012 is 102 percent of what I was making and my total income (counting that third annuity) is 110.5 percent of my final total while still on the job.
It will be even better (I'm roughly figuring about 131 percent) when the fourth annuity kicks in in 2016, even with the recent minuscule annual Social Security cost-of-living increases.
I am certain no financial adviser would sanction my do-it-yourself thinking and execution, but it has worked for me. I am living at the same level I was while working. I travel, add to my savings and thoroughly enjoy my retired life.
Just taking an honest look at my money and future and not buying into either “something will come along to save me” or “I can't save anything and I'll have to work forever” has worked well for me.
[Editor's note: Bill mentions that “some dislike annuities because we are in a low-interest period right now”; but annuities are complicated investment products that, along with their benefits, may also have some drawbacks.]