For many people, the difference between a retirement filled with enjoyment, fun and security and a retirement dominated by worry, concern and fear depends on a single factor: income. But there are a number of words that must be placed in front of the word “income” before you can get what you really need.
And perhaps the most important one of all:
Spendable income means what remains of your income after taxes that is available to spend on the things you need and want throughout retirement.
Generally speaking, there are two ways you can try to increase spendable retirement income. One approach is to attempt to increase the growth rates or returns on your savings and investments. A one or two percent increase in return each year can
make a big difference in the amount of income your portfolio can provide. Unfortunately, from a risk management perspective, we know that in order to get a boost in return we must either select financial instruments higher up on the risk vs. reward pyramid, meaning more risk of investment loss, or instruments higher up on the time vs. reward pyramid, meaning committing our money for longer terms or maturity dates.
But for some, there may be another option that should at least be considered. If we can find a legal way to reduce the amount of taxes we must pay on our income, then we end up with a greater amount of net after-tax spendable income.
For example, assume your savings along with your Social Security provides you with a total annual gross taxable income of $80,000, and that taxes consume 25 percent of that. You are left with $60,000. This is enough to meet your basic, essential living expenses necessary to keep a roof over your head, buy groceries, pay your medical bills and for other essentials. Unfortunately, little remains for vacations, to pay country club dues, buy gifts for the grandkids, go out to dinner or do the other things that might make life more enjoyable. Let’s say you would like an extra $4,000 a year to go on an ocean cruise or other trip. If you have savings of $400,000, one solution would be to figure out a way to increase the annual rate of return it generates by 1 percent ($400,000 X 1% = $4,000). If the rate of return currently generated on your savings equals six percent, you would have to figure out a way to boost the overall return to seven percent to generate the additional $4,000. And again, this will likely require that you either expose your savings to a greater risk of investment loss or commit your savings for longer periods of time.
A possible alternative is to try to generate an additional $4,000 by reducing your tax rate from 25 percent to perhaps 20 percent. Now, instead of having a net after-tax income of $60,000 ($80,000 – 25%), you would have $64,000 ($80,000 – 20%). Your spendable income increases by $4,000.
As long as you used a legal method to reduce your taxes, it potentially becomes a way of increasing your spendable income without increasing exposure to the risk of investment losses. From a risk management perspective, it doesn’t get much better than that.
Few things will be more important than your future retirement. And the way time flies, it will happen before you know it. We can help you plan for the inevitable.