Last week I shared the sobering news that when you add up the taxes you pay to the feds, payroll tax, Georgia state, etc., you’re probably paying more than 30 percent of your income to some form of government. And this doesn’t even include property, sales, gas, and ad valorem taxes.
I don’t advocate moving to Canada or Europe — unless you want to pay even more taxes. What you can do is educate yourself and adopt what I call a TSL-driven budget. That’s a budget containing the three buckets where most of our dollars go: Taxes, Savings and Life.
Retirement planning will be a whole lot easier with my TSL guidelines:
Taxes: 40 to 50 percent
Pro golfer Phil Mickelson recently got in hot water when he complained 62 percent of what he earns goes toward taxes. Few of us feel sorry for a guy who makes close to $50 million a year. But his complaints weren’t that far off the mark, even though CNBC reported his estimate was a little high.
Consider the new federal tax bracket that’s nearly 40 percent on families with annual income north of $450,000, add California’s 13 percent income tax, and you almost start to feel sorry for Lefty. Almost.
Taxes take a huge bite out of all our paychecks. So budget 40 percent of your income for taxes (closer to 50 percent for really high income households), and you’ll have a good sense of what’s left for your Savings and Life buckets.
Savings: 20 percent
For many years Vanguard recommended saving between 8 and 12 percent of your gross income to guarantee a happy retirement. Recently, they upped that guideline to 12 to 15 percent, thanks to lower return expectations in the future. I advise clients to try to save 20 percent of their gross income.
Twenty percent is a significant number, but take into consideration the many tax-advantaged ways to save — such as a 401(k), 403(b) or a SEP IRA — and you can get there a lot faster than you might think. And you may be able to retire a lot sooner than you think.
If 20 percent seems unrealistic right now, just start somewhere and work up to it.
Life: 30 to 40 percent
Now, we’re at the truly discretionary spending. The remaining 30 percent (40 percent if your tax bite is lower) of your income goes here. Spending just 30 to 40 percent of your income during your working years on living (food, shelter, transportation, insurance, kid-related costs, entertainment and the like) will allow you to maintain your lifestyle once you retire.
For Mickelson, that means limiting his Life spending to about $15 million a year.
My TSL formula may seem harsh at first, but who said getting to Easy Street (and a happy retirement) was going to be easy?
How close are you to my suggested breakdown of 40/50, 20 and 30/40 percent? Think it’s about right or way off-target?