How much do you need to retire happy?

By Offain  Gunasekara •

[’s Interview with MRT’s Dr. Grubbs]

What is your number?
That question is often directed at people dreaming about how much savings they will need to achieve retirement bliss. But M. Ray Grubbs, professor of management at Millsaps College in Jackson, Miss., says the query misses the point. There is no magic amount of money than can guarantee a secure retirement for everyone. Individual wants, needs and circumstances dictate how much cash will be enough to see you through the golden years.

In the following interview, Grubbs discusses how to zero in on the precise amount you need to retire comfortably.

Is it financially smart to set a retirement date when retirement  planning?
Absolutely. A specific retirement date is essential, as it provides an absolute target or goal for the retiree and advisers. If I set a date to retire on Jan. 1, 2018, I make important decisions each day and each month that lead to that goal. If I do not, then my decisions made today will likely be different.

For example, if a 25-year-old has a vision of retiring at the age of 50, this will drive a disciplined approach to investing and spending that can yield that goal over a 25-year work life. I may take a pass on that Porsche in favor of a Ford. However, if that same 25-year-old had a vision of retiring at the age of 75, then day-to-day, month-to-month and year-to-year financial decisions will be different.

Certainly, we understand that things will change along a 25- or 50-year work life. But these changes do not negate the need to have a definitive planning horizon.

What is the ideal amount needed to retire presently? What do you think the amount will be in 25 years?
Let me be very clear with this response: I have no idea! And neither does anyone else. There is an infinite number of variables for individuals and families, (so) there is no way to specify a single number that will suffice for retirement.

I have seen cases where a retiree had negative net worth, certainly not an ideal amount in anyone’s calculation. But that person retired comfortably with two pensions and Social Security in amounts well in excess of their expenses. In this case, zero dollars was an ideal amount. In another case, a retiree had a net worth in eight figures. That retiree is now bankrupt due to poor — really too soft a word here — spending habits. They spent themselves into bankruptcy, so in this case, eight figures was not an ideal amount.

When pre-retirement expense planning, what are a few ways to reduce your monthly costs and save more money for your retirement?
I … can offer no advice about how to cut an individual’s expenses. I have enough trouble doing that for myself to give others advice. But I can offer some experience that is serving me well.

The framework that follows is the Modern Retirement Theory pyramid — a priority-ordered series of funds established for specific expense purposes.

I keep a spreadsheet of all my expenses on a monthly basis. As I go through my monthly expenses, I take note of what I may reduce.

Then I look at all expenses and separate all those that I define as base expenses — those expenses that I must incur month to month to live with my chosen lifestyle. It is important to develop income that is stable, secure and sustainable to cover base expenses, and slightly more if that makes an individual comfortable.

As I come to a comfort level for my base expenses, I direct my attention to what Modern Retirement Theory calls contingencies. These are unknown expenses that can serve to derail retirement plans. Contingencies are such issues as disabilities, inflation, market returns, long-term care and death of a spouse that all retirees should think deeply about before initiating their retirement.

Next, my attention turns to discretionary expenses. Discretionary expenses are those lifestyle expenses that are wants and not needs, such as a new car, a cruise or a month in Tuscany, Italy. By definition, these expenses are not necessary to live and can be delayed if circumstances warrant, but not discarded.

Finally, if there is anything left, I contemplate legacy expenses. If I have resources available after providing for base, contingency and discretionary expenses, I can leave assets to a charity or to family members.

For people who want to travel during retirement, what tips can you offer so they can live out their dreams of being world travelers and still be financially stable?
I can only answer this in the context of the Modern Retirement Theory pyramid. If that person has covered their base and contingency expenses first and has resources to dedicate to discretionary expenses, I say book the trip now. But do not (book trips) and leave base and contingencies  uncovered.

Is there an advantage to using a retirement planning coach?
I suggest there is benefit to using anyone who can help the retiree understand the context within which decisions can and must be made. But take the time to understand the perspective of the coach or adviser. To many insurance salespeople, there  is an insurance solution to most all questions. If you seek advice from an  investment broker, advice usually takes similar forms regardless of individual  needs. Just be cautious about a coach or adviser, and know how they think.

We would like to thank M. Ray Grubbs, Ph.D., professor of management at Millsaps College in Jackson, Miss., for his insight.

Annuities Pensions Social Security

Retirement Base Income Vehicles

Designing a retirement plan can feel overwhelming. Retiring is one of life’s most significant transitions and should be entered into through careful
planning. Retirees should start by deciding how to replace their needed income.

Base Income should be matched up against your Base Expenses1 (essentials – food, housing, medical, transportation, etc.). Base Income should be secure, stable, and sustainable.2 Since no individual knows how long they will live (their own personal longevity), Base Income should be created from sources that are paid over lifetime – however long that is. This article is aimed at offering you some viable approaches to income planning for your unknown lifetime.

In this context, here are a few options you may consider as viable when creating your Base Income streams and a brief summary of each. Deciding when and how to use any of these are beyond the scope of this article, but there are ways to maximize or optimize any of these options when creating an individually secure retirement Base Income Funding strategy.

Social Security

Social Security may represent a significant strategy in your overall retirement plan. Steve Goss, the chief actuary of Social Security was recently interviewed by Reuters.3 Here is how he described maximizing Social Security benefits:

Q: …Is there a way for people to “buy” more Social Security than they could otherwise get?

A: There’s one way to do this that is discussed extensively. Social Security uses a formula called the primary insurance amount, or PIA. If you wait to start receiving Social Security until your Full Retirement Age (FRA), you get 100 of your PIA. If you take it at 62, when you first become eligible, you get only 75 percent. But if you wait until age 70, you get 132 percent of the PIA.

From 75 percent to 132 percent at 70 – that is close to a doubling of the monthly retirement income that you can have for the rest of your life. What’s key on this is that Social Security is one of the few providers of a true inflation-indexed life annuity. So if people who do have some savings would use those assets to push back the date that they file for Social Security benefits, they can, in effect – easily and at a very good rate of return – “buy” a CPI-indexed life annuity.


Traditional pensions, while diminishingly scarce in the marketplace offer lifetime guaranteed income. All pensions are different, some offer cost of living adjustments, while others do not.

Low-cost Variable Annuity with Guaranteed Living Withdrawal Benefits (VA/GLWB)
A low-cost variable annuity with guaranteed living withdrawal benefits offers many the peace of mind to have some market exposure with some protections.

Income “withdrawals would reduce the account balance in the VA, and, if the account were depleted (by long life or poor investment performance), the guarantee would kick in and payments would continue for life.”4

The goal of this annuity structure is to try and use the stock market to help stay ahead of or with cost of living increases, while paying for some insurance on your future income if the market does not perform well. Also, please note annuity vehicles have special tax implications to consider.

Deferred Income Annuity (DIA)5

Deferred Income Annuities are relatively new, but may provide another means of guaranteeing retirement income. Retirees pay an insurance company a specific amount of money today, and in a stated number of years the insurance company promises to deliver a monthly income check for life.

Single Premium Immediate Annuity (SPIA)

Unlike DIAs which promise income in the future, SPIAs are a traditional annuity structure. Retirees pay a sum to an insurance company now and the insurance company pays a monthly check for a stated period or over lifetime.

All of the above listed options have opportunity costs, tax implications, and pros and cons that should be evaluated based on your individual situation.

While there are many helpful tools online, hiring a CERTIFIED FINANCIAL PLANNERTM practitioner from the Financial Planning Association (FPA) will enable you follow a multi-step process that comprehensively examines your retirement goals, needs, and will inform you of your ability to meet these based on your total assets and retirement income. If you are thinking of retirement, contact a qualified financial advisor from FPA today.

Originally published by the Financial Planning Association here.


  1. Base Expenses, as defined by Modern Retirement Theory, are mandatory living expenses of food, shelter, clothing, medical, transportation, and utilities.
  2. The 3-SModel which is secure, stable, and sustainable is a premise of Modern Retirement Theory. “Modern Retirement Theory”, Journal of Financial Planning’s Retirement Distribution Supplement, December 2009. Copyright Jason Branning and Ray Grubbs.
  3. “How to get the most from Social Security”, Mark Miller.
  4. “Flexible Strategies for Longevity Protection: Comparing Two Products” by Joe Tomlinson. Advisor Perspectives. April 10, 2012. Retrieved on 4/19/2012
  5. “How to Create a Pension (With a Few Catches).” Anne Tergesen. Wall Street Journal. Retrieved on 4/9/2012

Social Security Taxes

Social Security Income’s Tax Implications – FPA General Public Website

Social Security evokes many emotions by Americans – love, hate, ridicule, and praise. The fact remains; Social Security is the most successful social program in history and currently offers guaranteed income which increases over time and continues across your lifetime.[1] While successful, it is a nuanced retirement program. One of these complexities is navigating and understanding the tax implications of Social Security’s retirement income.

Not all retirement income streams are equal. Some forms of income are subject to ordinary income tax, others capital gains, and still others, no income tax. It is essential that retirees have a working understanding of this concept, in order to achieve retirement income efficiency. By knowing how Social Security’s income is taxed, retirees can be better empowered to decide when to start collecting monthly retirement income. When it comes to retirement income planning, the net (bring home) income must be planned and managed. (Read Retirement Income Tax Strategies)

Retirement is a consumption phase of life, so maximizing the way retirees use the assets and available income streams is paramount. To maximize all the assets and income streams, a comparison of when retirees take different types of income is beneficial. One major component in deriving a higher net retirement income is through maximizing the tax efficiency of Social Security. Delaying the start of Social Security claiming can prove to be an enormous tax benefit for retirees, as well as serve as a longevity hedge.

Unlike distributions from 401(k)s and traditional Individual Retirement Accounts (IRAs), which are taxed at an individual’s or couple’s ordinary income rates, Social Security offers some tax favorability when income is received. No retiree pays taxes on more than 85 percent of their Social Security benefits, and that percentage can be less.

TABLE A: Income Taxes owed on Social Security Income

Tax Status Threshold limit 2011 % Social Security Income Taxed Single Up to $25,000 0% Between 25,000 and $34,000 50% Above $34,000 85% Married Filing Jointly Up to $32,000 0% Between 32,000 and $44,000 50% Above $44,000 85%

Retirees must use the Internal Revenue Service (IRS) “provisional income” formula to determine how much of their Social Security benefits are actually taxable.[2] Provisional income is defined by the IRS as the sum of wages, taxable and nontaxable interest, dividends, pensions, self employment and other taxable income plus half (50 percent) of your annual Social Security benefits.[3]

There are there different calculations that the IRS has set to determine the actual taxable amount of a retirees Social Security benefits. The lowest result of the three thresholds will be added to the total includable gross income. For planning purposes, pre-retirees can compare the tax efficiency of collecting benefits at different ages (use age 62 through age 70 from your Social Security Statement) versus taking some other form of income prior to starting Social Security, like a distribution from a traditional IRA or 401(k), by following the example in Table B below.

Table B, Approach A, evaluates a retired couple who takes Social Security at normal retirement age. In Approach B, the couple waits to collect benefits until age 70. Approach A retirees need $25,000 more annual income (Adjustment Amount) from their IRA than Approach B retirees, who have larger income from Social Security. Even though Approach A and B have the same pre-tax income of $90,000, Approach B proves to be more tax efficient. Approach A’s taxable income is $70,975 while Approach B’s taxable income is $35,350 because of Social Security (a difference of $35,625). If retirees decide to use Social Security as longevity protection for the highest monthly income benefit by waiting to collect until 70, they will also be maximizing income under current law. (See Table B)

In summary, there are many factors that should be considered when you decide to begin Social Security. One of those primary factors is choosing to maximize the tax efficiency of your Social Security Income. For additional information about ways to decide when to take Social Security read Social Security: To Maximize Payments or To Maximize Income? This article does not constitute legal or accounting advice. Please see a qualified professional who can assist you on the basis of your individual facts.

Originally published by the Financial Planning Association here

Author Note: This article was inspired by the work of James Mahaney & Peter Carlson. “Innovative Strategies to Help Maximize Social Security Benefits”Prudential Whitepaper, September 2010. Retrieved on 2/15/2012.

  1. Social Security benefits are subject to Congressional law. Benefits may be reduced or eliminated at any time.
  2. & IRS Publication 915
  3. “Social Security & Taxes.” AARP. October 2011. Retrieved on 2/20/2012.