by John H.W. Cole, Esq. and Mark E. Melendy, Esq.
Do You Have What It Takes (To Retire)?
Introduction
On May 21st of this year a select Senate
committee met to hear testimony about the
needs of U.S. retirees and the status of Social Security. Teresa Ghilarducci, economics chair at The New School, in New York,
explained what it takes to retire comfortably. The average worker, making $50,000
per year, needs investment assets equaling fifteen times his salary to maintain his
standard of living. Social Security provides
about five times his salary, so he needs another ten times his salary, or $500,000, in
a retirement account. Middle and high income people need 95% to 100% of preretirement income to maintain their living
standard because many are in debt—still
paying mortgages. Individuals in the top
quartile earn on average over $100,000 per
year, so they need over a million dollars in
their retirement accounts at retirement. On
average the persons in the top quartile will
have only $140,000 saved at age 65. This
converts to about $5,000 per year—leaving barely enough for a dinner and a movie
once a month.
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Ms. Ghilarducci continued that if a worker starts at age forty he would have to save
over 25.8% of his income to age sixty-five
to achieve an 80% replacement rate. If he
started fresh at age fifty he’d have to fund
over half of his earnings to get there. The
gist of the testimony of other witnesses at
the hearing was that most Americans are
in no position to retire and maintain their
standard of living, and that the Social Security system is in no position to even maintain what it currently provides. If you are
like most Americans, please continue reading. If you have inherited well you may skip
the rest of this article.
What Assets Count
The first reality you need to recognize is
that your net worth doesn’t matter. Neither
your boat, nor your car, nor your house, nor
your timeshare produces income. If anything, these assets are money pits. What
counts are your investment assets and the
income they’ll produce. The second reality
is that you are a lawyer practicing in lovely,
rural Vermont, not a partner of Arnold &
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Porter in Washington, D.C. The sale of your
interest in your practice won’t provide what
you need for retirement.
How to Accumulate Significant Savings
The third reality is that you will not be
able to save the amount you need from
your after tax compensation. Federal and
state income taxes, payroll taxes, and possibly a single-payer health insurance payroll
tax, will all take too big of a bite out of your
practice income. Funding an IRA, while
beneficial, is a drop in the bucket. The only
way to accumulate retirement savings rapidly is by consistent, significant, funding of
a qualified plan, with pre-tax dollars.
When your practice funds a retirement
plan for you, through a professional corporation, you are putting 100% of your
income to work. If, instead, you pay your
state and federal income taxes, payroll taxes, and (God forbid) an 18% single-payer
payroll tax on income that you want to save
for retirement, you will be putting only half
of (or less) of your practice income to work.
The amount you can ultimately accumulate
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