Retiree Income Projection

"My Dear Friend,

It was so nice to bump into you the other day and learn that you have started your Master's degree, my best wishes to you this year.

I am guessing you will be the right person to help me with this. As of today, I have retired as I wish to spend more time with my wife and see more often my grandchildren. I feel that having worked for 45 years has earned me deserved permanent vacations in the State of California, U.S. I think I have saved enough to live out of my savings, but I am unsure about how much longer my savings will last. And this is where you come into the picture, hope you can help me to work out some numbers.

My partner is very worried as they feel we have below 14 years left of cash. This is how they do their math. Our annual spending budget is 70,500 USD and I have 980,000 USD saved combined between my Investments Retirement Account (IRA) and a savings account. Therefore, 980k divided by 70k is 14 years. If this is correct, I would be exactly 78 years old when we run out of cash, and given that the current life expectancy in the US for males is 77.3[1] years old it seems that we will have some problems. You know how healthy lifestyle I have always carried. I never smoked, always watched my diet and next May I will be running my 15th marathon and I plan on keeping running. Hence, add at least another three years to my life expectancy.

I told my partner that we cannot do the math as simple as that, my IRA and saving accounts have nice interest rates of 8% and 6% respectively. Therefore month after month they produce some earnings. But then my partner pointed something very valid, every time we go to do the grocery shop prices are increasing.

I called my tax accountant to check if he could help me, but he was in a rush as one of his big clients is being audited and he said he wouldn't have time to help me this time. He was able to explain to me a couple of things about how my IRA account works. He said that I will not be able to withdraw money from the IRA until I turned 70. This got my partner even more anxious. Our savings account has 580,000 USD as of today, and with our level of expenses, it seems it will last for 8.3 years. This means that, with the

prices increasing and increasing, the year before we can withdraw money from the IRA we will have some difficulties in covering our expenses.

My tax accountant then mentioned that once I can access my IRA I must withdraw a minimum amount every year, and that amount increases year after year. And if I need to I can withdraw more than the minimum. It seems that once I can access my IRA I will have to withdraw more money than the minimum since I will be out of cash.

He finally said that every time I withdraw money from the IRA account the entire amount becomes subject to taxable income. I was surprised, as my savings account is taxable only on the earnings it produces, whether I use the money or not. But he insisted that the IRA account is different. The IRA earnings are not subject to taxes as long as the earnings are kept in the IRA, once you withdraw money from the IRA account the entire lump sum becomes taxable whether capital or earnings. So this makes me hesitant about using money from IRA account until I really need it.

The situation got even more complex as he kept describing the taxes issue. Depending on the amount of taxable income I will have to pay different tax percentages determined by something called tax brackets. Depending on the tax bracket I fell under there is a fixed base amount of taxes I need to pay plus a percentage applied to the excess of income versus the lower limit... Yes, I also rolled up my eyes when he said that as I cannot understand what that means. I am writing verbatim here to you what he said, hoping you will be able to make sense out of that.

He sent me a table with the tax brackets, which I am ​attaching to this email .​ For the IRA required minimum distributions (RMD's) he told me I can "google" them as there was a recent change and the table he had was outdated. He says is very easy to find it on public websites. Finally, after I shared with the accountant my wife's concerns about prices increases he shared with me a table with the projected inflation for the next 38 years.

So I have many questions I am hoping you can help me answer: Do I have to worry about running out of money before turning 78 as my wife says, what about when turning 83? Will my savings account last enough before I will be able to withdraw money from the IRA? If not how many months and for how much would I have to cut my regular expenses so that I will make it until the IRA funds become available? Once I can access the IRA should I withdraw more than the minimum required? How much taxes will the government have collected from my IRA proceeds until it gets exhausted?

I hope you can help me see the light here as I am very worried. Thanks in advance."

Help him to prepare an Excel template that calculates his cash flows by the month considering all the variables and information he has provided to you. Make sure you use only formulas in computing your file.

Write the answers to his questions in an email format (a Word document) you would send to him and submit it together with the Excel file you prepared. The email must be 600-word long (+/-10%)