The Spending Needs amount on Moneytree Advise’s Retirement Capital Analysis is straightforward for single clients or when both individuals retire in the same year. It is not as clear for couples when one individual retires and the second continues to work.
Moneytree Advise begins tracking expenses on the Retirement Capital Analysis as soon as one person retires. For couples, when an individual continues to work after the other retires, the expense amount reduces on the Retirement Capital Analysis by the net effect of his or her earned income.
Example:
Let’s work through an example where one individual is retired and the second is working in the first year of the plan.
Plan Variables
| Retirement Expenses | $100,000 |
| Working Individual Salary | $50,000 |
| Pre-Retirement Tax Rate | 25% |
| Contributions to Qualified Retirement Plan | $10,000 |
The first year of Spending Needs on the Retirement Capital Analysis will be $70,000, which is broken down below.
Earned Income after Contributions and Taxes
| Working Individual Salary | $50,000 |
| Contributions to Qualified Retirement Plan | (10,000) |
| Tax Due on Salary ($40,000 * 25%) | (10,000) |
| Salary After Tax and Contributions | $30,000 |
Spending Needs Reduced by Net Income
| Total Retirement Spending Needs | $100,000 |
| Salary After Tax and Contributions | (30,000) |
| Reported Spending Needs | $70,000 |
Once the working individual retires the expenses will jump up to the $100,000 level increased by the inflation factor, as shown on the image above upon Ind. 2’s retirement at 65.
Spending Need Factors
Additional factors come into play when calculating the spending needs amount. The following list provides all possible factors.
- Retirement expenses start when either individual reaches retirement age.
- The base spending amount is the value of the “Annual expenses during retirement” entered in Expenses input, increased for inflation.
- When one individual retires, and the second still works, the program applies the working individuals after-tax and after-contribution income to reduce the spending need.
- If additions are continuing into retirement, even if both individuals are retired, the after-tax expense of the contributions goes into the spending amount.
- When debt payments are included in expenses, any payments continuing into retirement are added to the spending amount.
- After the life expectancy of one individual, the spending need will change to “Annual expenses for a survivor in retirement” entered in the Expenses input, increased for inflation.
