Saturday, January 27, 2018

How Much Income Do You Need In Retirement?



























Most people believe that they must save enough money to replace 100% of their pre-retirement salary to achieve a secure retireent income.  The truth is that the recent retiree only needs a percentage and is based upon their last year's salary.  This is called the retirement replacement ratio.

Empirically, your replacement ratio is inversely related to your pre-retirement income. The higher your income before retirement, the lower your replacement ratio. Social Security serves as the counterbalance, covering a larger proportion of post-retirement income for those who made less pre-retirement. This makes sense, as people with higher paying jobs had proportionally more of their income going to retirement, job-related expenses and taxes before retirement, rather than necessities.

Marlena Lee at Dimensional Fund Advisors found median replacement ratios by income level:  The table below shows the replacement ration, based upon the pre retirement income.

Salary............Replacement Ratio...........Retirement Income

<$25,870.....................82%...........................$21,213

<$49,941.....................72%...........................$35,958

<$86,882.....................62%...........................$53,667

*119,472.....................58%...........................$69,293

*The $119,472 was used since it represents the maximum teacher salary as of June 2018.

Obviously, if a teacher reaches his or her full retirement age, they will have a pension, social security, and TDA savings that , combined, will exceed the retirement replacement income. The reason the retirement replacement income is less than the final salary is that the retiree no longer pays Social Security and Medicare, communing costs, and , everyday job expenses like clothing, food, and materials.

Sounds like teachers should have little problem having a secure retirement income,  However, remember,NYC teachers  who reach full retirement age is the vast minority, even just reaching vesting time to qualify for a pension is difficult with only 33% of Tier IV NYC teachers reaching that mark. I suspect for Tier VI teachers it will be significantly lower.
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70 comments:

Anonymous said...

thanks for writing about this as it is all I want to read about and keeps me in this game.
no state & local taxes.... no TDA contribution -- means a decent check.
In retirement, do we still have to pay union dues?
In retirement, we have to pay for health benefits but we get dental benefits which is great - the average medicare coverage does not include dental -- big win for us.
Pension plus TDA interest plus SS - means a comfortable life.

SURE PEOPLE MAKE MORE MONEY THAN TEACHERS but they are not retiring @ 55.
THERE IS NOTHING OUT THERE THAT BEATS THIS PROMISE - A check for life w/ health benefits @ 55 - this is why we stay. Remember this when you can't take it anymore.

Anonymous said...

I understand what you are saying and what the financial advisors tell people, however , no one is factoring in inflation. Inflation should be a huge factor in projecting what you'll need in the future. Just think back 10 years and look at what things cost then and now.
I know people who retired 15 years ago with what they believed was a "windffall" monthly income. But today it doesn't look very impressive like it did then.
So let's not forget inflation especially since today , they don't even bother printing money. They use emoney (debt instruments) and cryptocurrency Ms who knows what else.

Anonymous said...

My God, if those numbers are true, a retired Tier4 NYC teacher lives a very very comfortable life. Tack on the TDA fund and he practically has no worries!!
Let's not forget about the QPP (collected by our ASAF and MCAF) which easily
adds another 75K !!!
There is nothing sadder than seeing the newbie 26-28 year old Tier6ers. Number one, half won't make it to 63, and for those that do, they're retirement package stinks compared to Tier4.

Anonymous said...

My concern is that the COLA we get on our pension is so low that a 70K pension may be great now but not so great in 15, 20, 30 years. People who retire at 55 typically have a long time left on this planet while the value of their pension dwindles every decade. Luckily I've heeded Chaz's advice and have a solid TDA balance and some money in equities. Now I just have to turn 55...

Anonymous said...

i remember starting a little over 20 years ago- the tier 1 teachers laughing at me.
the more things change etc...

Chaz said...

True, but Tier VI is a different animal altogether.

Anonymous said...

I am 3 years from retirement (YAY!) and was even able to buy back time from summer work as a lifeguard at a town beach years back....so I was able to buy what amounted to almost 1.5 years--I will retire at 55 with 31 years of DOE service and another 1.5 years...AND won't touch my TDA (now about 500K)....and I figure will be worth 1 million by the time I touch it....and withdraw the interest and leave the principal until they force me to take minimum distributions.....

Life will be sweet! Just hope the next 3 years aren't pure hell.

Anonymous said...

As Chaz has often advised...Pump up that TDA contribution every chance you get. The TDA and social security will help as inflation eats away at our pension. If you can also contribute to the 457 or a Roth plan of some kind, do it. TDA and a Roth mutual fund in equities are why I will be able to walk out at 55 with 30 years and never look back at the hell hole of a system that tries to kill us on a daily basis. Our 7% in fixed is guaranteed for another 20 years until the doom and gloom of a possible NYS ConCon once again rears its ugly head. The original tier IV was the last decent pension. I honestly don't why ANYONE goes into teaching these days. Who the hell can last being abused for 40 years for a pension at age 63?

Anonymous said...

Hi all,

Retiring soon with 30 plus yrs too - we have to hope our 7 % fixed continues to hold up, otherwise we have to figure out what to do as a plan B.

Anonymous said...

8:24 - Buying back months spent working for the state/town prior to a full time teaching career is one well known way to increase one's pension. Of course these can't be from teaching years...since the max credit for one year teaching is one year of service credit.

Anonymous said...

I have 5 years to go before I can retire at 55, though I plan on sticking around 2 more years after that to get to a solid 20 year pension.

Life is so short that I cannot ever see myself putting more than 20 years in this soul-sucking system of fictions and lies.

I am pumping that TDA, investing and getting rentals to make up the difference since my pension won't be the larger 35-30 versions.

With Danielson's, abusive admins and kids who don't care I also don't know why anyone would go into teaching, forget about the awful Tier 6 provisions!

Anonymous said...

Chaz, do you subscribe to the Investopedia newsletters or look at their website?

www.investopedia.com/news/stocks-move-further-record-territory-0

There's a lot of interesting financial advice to be found.

I opened up three brokerage accounts with one of the major international banks:

Account 1: 80% equity, 10% fixed, and 10% hedge funds

Account 2: 27% equity, 63% fixed, and 10% hedge funds

Account 3: 81% equity and 19% fixed

Within the last month, the total increase in value among all three accounts was approximately 3.3%.

The accounts are completely liquid -- money is available in two to three days if needed.

I'll keep my fingers crossed that the stock market will continue to perform well.

retired teacher said...

to 12:49-- Membership in the UFT once you retire is optional. The Union has dental and eyeglass plans. If you retire under age 65 you will also need a prescription drug plan.

I am concerned that the Janus ruling, expected at the end of February, will really hurt the union - especially things they offer to retirees.

Anonymous said...

Maybe you can create a chart that compares prices for basic items for today to 10 years ago and 20 years ago.
Things like a subway fare, a cup of coffee , a cab ride, rent for a two bedroom etc.

Anonymous said...

The benefits of contributing to the TDA and 457 plan are HUGE! Just by tax deferring that money you are getting an immediate 11% bump in your money! You get to avoid city and state taxes and reduce your federal income taxes too. Even if you don't move to Florida, New Hampshire, etc. which are tax free states, it's very unlikely you will have to pay as high in NYC or NYS taxes ever.

Anonymous said...

I'm looking for a retirement job after I retire to supplement a smaller pension. Bottom line-I'm grateful for the pension- without it I'd have to work forever.

Anonymous said...

To 5:37 The city offers the dental, eyeglass plan to retirees. They give the cash to each respective union to administer their welfare funds. PSC CUNY offers a drug plan to retirees unlike the UFT. How is the UFT spending its city money in the welfare fund? How high are administrative costs?

Anonymous said...

The ONLY reason I am still working for the hellhole that is the DOE is my pension and TDA. If it were not for those 2 things I would be gone in a heartbeat. I think of that every time I have a shitty day at work, (Which is a lot of days!)

Anonymous said...

If you are like me, soon to retire and moving to New Jersey, you will find the tax info on this link helpful:
http://www.state.nj.us/treasury/taxation/new2017.shtml

Anonymous said...

Anon 848.....why on earth would you retire and move to NJ? Might as well move to Suffolk county.

Just a few miles west is the state boarder.....PA.

anonymous said...

can you increase your TDA past $24,500 ? has anyone done this that is close to retirement?
also how do you find out about the 457B plan?


Thanks everyone!
anonymous

anonymous said...

can you increase your TDA past $24,500 when you are over 55 years old and a year away from retirement?

thanks

Anonymous said...

1:38. Google “nyc deferred compensation “ then call them.
You can contribute $24,000 to tda AND $24,000 to Roth 457
Or you can do what I do and ditch the Tda and max out both the 457 and the 401k

Anonymous said...

Regarding 457 plan , google 457b NYC, the info is on their site.

Anonymous said...

Annymous 1:38 and 1:39
IRS max is 24,500 for 2018 tax year if you are 50 or older. re: 457 plan copy and paste link https://www1.nyc.gov/site/olr/deferred/dcphome.page

Anonymous said...

Are the NYC Deferred Comp Plan withdrawals (in retirement) taxed for NYS/NYC?

anonymous said...

How do you have your 457 Allocated ?
With one year to go to retirement should I still put money into the 457 or 401 ?
Thanks

Anonymous said...

1:40 if you choose the ROTH (after-tax) option for your investments in NYC Deferred Comp. you will not pay any tax, Federal nor NYS/NYC,when you withdraw in retirement. Furthermore, unlike TDA, your beneficiaries will never pay any taxes on it.

Anonymous said...

2:51 During your last 3 years the 457 has a catch up program called Deferral Acceleration for Retirement (DAR) that allows you to contribute twice the annual limit, which is now $37,000.

So, you could contribute $37,000 to 457, plus $24,500 to the 401k for a total of $61,500 each year.
If you take advantage of this incredible opportunity you can save, tax deferred, $184,500 in your last three years. If you choose the Roth (after-tax) option the withdrawals during retirement will be TAX FREE.

Anonymous said...

Does the DAR apply to those that are retiring at 55 years of age as well?

anonymous said...

Thank you !
Also do you know the percentage of the RMD at 70.5 years that you have to take out
Let’s ssy for example you have 400k by 70.5 years of age ?

anonymous said...

I wish I knew about this I have a year to go from retiring from the DOE do you think I should still do the Roth option , can it still grow ? Which one do you recommend ?

anonymous said...

What do you live on ? Lol

Chaz said...

Anon 6:23

The RMD is 3.65% at 70.5 yeats

anonymous said...

Thanks for the answer !!
After 70.5 years when is the next time your age that they make you do another RMD ?
Also once you retire 7% interest you get in your TDA compound each year with interest ?
Thanks

anonymous said...

Also after you retire is it best to take out a loan from your TDA or a withdrawal from your TDA before 59.5 years ?
What’s the penalty on a withdrawal from your TDA after retirement ?

anonymous said...

Also once you retire can you switch from family health insurance to single like three years after you retire ?
Thanks so much for all your info

anonymous said...

For every year you have to withdraw that amount after 70.5? Do you still get your 7% interest ?

anonymous said...

I have -8 days left in my bank so you think it’s best to try to buy back some of these days before I retire , it’s very expensive over $350 a pay check or how does the city go about getting the money back from you once you retire with negative days in you CAR ??

Chaz said...

Anon 8:42

The 7% interest is based on your TDA balance in January. The RMD starts at 70.5 at 3.65% and increases every year after.

Anon 8:44

You can take out the tDA at 55 if you are retired, without a penalty.

Anon 12:47

Not worth it.

Anonymous said...

whenever I need to see RMDs for various ages I google Chaz UFT RMD. His blog post link on RMDs has a helpful chart.

Anonymous said...

Please answer
Does the DAR apply to those that are retiring at 55 years of age as well?

55/25 said...

9:46 yes DAR applies to 55/25. Remember it is the last 3 years BEFORE your retirement year. In other words if you are retiring in 2022 you can do DAR in 2019, 2020, and 2021 only.
Question, why isn’t our Union making us aware of the DAR and ever other great opportunities from NYC Deferred Compensation?

Chaz said...

Anon 7"07

Read this link

http://chaz11.blogspot.com/2016/04/our-tda-and-required-minimum.html

anonymous said...

You have to pay taxes and penalty before 59.5,years ? Can anyone clarify

anonymous said...

Thanks

anonymous said...

If I am retiring in a year could I still do DAR ? I am maxed out on my TDA trying to build up things before I retire

Chaz said...

aNON 9:40

iF YOU RETIRE AT 55, YOU DO NOT PAY A PENALTY FOR TAKING FUNDS OUT OF YOUR TDA

anonymous said...

Chaz if you retire on July 1 2018 do they still take out the tda withdrawal from your summer checks or it stops ?
Also do they take our tda withdrawal from October 2018 retro check once you have retired ? I was golf to wait until 1/2/2019 and retire but I think it’s a silly move no full summer pay and the job is too stressful anymore for me to stay just to add a little to my pension you know when it’s over thanks !! Please reply

Anonymous said...

Great advice here everyone. I'm in my 30s and am in the dreaded Tier VI. I already contribute about 15% to my TDA every year and it seems you guys are recommending us to also contribute to the deferred compensation plan. I did some research on their website and just want some clarifications.

Should I only contribute to the 457 Roth plan? Why not the 401k? I'm very new in all this. Also, do you contribute to both pre and after tax plans like their NYC DCP website is recommending? Lastly, so the interest we collect is 7% just like the TDA right? Thanks everyone!

Anonymous said...

2:40 Stop contributing to TDA entirely. TDA does not have a after tax Roth option, therefore you will be forced to withdraw when you’re 70, and pay tax.
Choose the Roth 457, if you max that out do the Roth 401k. The 457 is slightly better because it has ‘catch up’ feature for your last 3 years.
There is no fixed rate of 7% in deferred comp, but especially for young teachers, the Roth after tax feature out weighs the 7% fixed rate. It’s all about taxes.
Open a Roth IRA through deferred comp, upon retirement roll over your Roth 457 to your Roth IRA, this will avoid RMDs starting when you are 70.
Whatever you do, try saving much more for retirement because you may burn out before age 63 full pension for tier 6.

Chaz said...

Anon 4:43

Really? Where can you get 7% with no risk? Remember, at 70.5 the RMD is only 3.65%. Plus the TDA is free of State and Local taxes.

anonymous said...

What’s not worth it ? Also if you retire 0n July 1 , 2018 do they take tda out of your summer checks ?

anonymous said...

Wanted to know when they calculate per session pay into your pension is it the gross or net amount ? How do they figure the amount into the FAS ? If you are retiring on July 1 , 2018 do they go back to your amounts from three years ago July 2015 ?? Can anyone please clarify this ?
Thanks

Anonymous said...

Chaz, are all TDA withdraws during retirement free of state and local taxes, or just $20,000 per year?
If you have 1,000,000 in your TDA at age 71 your RMD will be $40,000 that year. By the age of 84 your RMD will be $80,000. At 90, RMD is $100,000. These withdraws may put to in a higher tax bracket.
That money you are forced to withdraw goes from ‘never taxed’ to ‘forever taxed’

Chaz said...
This comment has been removed by the author.
Chaz said...

Anon 5:35

All per session gross pay is calculated for your pension.

Anon 5:46

All TDA withdrawals are tax free from the State and Local taxes. Remember, ROTH deferred instruments are taxed t the time of deposit. There is no such thing as a tax free ROTH.

Anon 5:31

The summer checks include a TDA contribution.

anonymous said...

For per session pay do they take an average of the last three or 5 years of gross per session our just the last three years added on from July 1, 2015 to July 1 , 2018 ? For example if you made $3500 in gross per session since July , 2015 until your retirement you just add that amount ? How is it calculated into your final salary let’s say it’s $60,000?
Thank you very much for answering these questions!!

Chaz said...

My understanding is that the per session pay for that school year is added to the salary and the total is then used for the highestr three consecutive FAS,

Example salary #100,000 per session $5,000. Total pensionable money is $105,000.

Note: TRS does not account for per session when calculating the FAS onine.

anonymous said...

Thanks for all the information !!! So you add your per session to all the 5 years going back to 2013 individually if retiring on July 2018 ?
Is per session pay included in the w-2 for each year from the DOE ?

anonymous said...

Also is it true it’s best to keep 3 exemptions when you retire or lower it in order to get a tax return or avoid paying back to the IRS ?
Any options on this ? Recommendations ?

anonymous said...

Thank you !!

anonymous said...

If you retire in July 2018 will the retro check in October still have TDA taken out ?

anonymous said...

If you retire at 55 and withdraw from your TDA after do you pay taxes on the withdrawal ?

Anonymous said...

You always pay taxes on any withdrawals from TDA.

Chaz said...

Only Federal taxes. TDA withdrawals are exempt from State and Local taxes in New York State.

anonymous said...

Hi
If you retire at 55 do you pay more federal taxes if you withdraw money from your TDA instead of waiting until 59.5 years old
Thanks !!

Chaz said...

I you retire at 55 the TDA taxes are the same as if you retire at 59.5 years old.

anonymous said...

Hi Chaz
If you retire July 1,2018 will tda money be taken out of the retro check for October 2018 ?
Enjoy the vacation !!

anonymous said...

Anyone know this answer please ??