Retirement Income Planning
Retirement income planning today has taken on many new dimensions that never had to be considered by earlier generations. For one, people are living longer. A person who turns 65 today could be expected to live as many as 20 to 30 years in retirement as compared to a retiree in 1950 who lived, on average, an 15 years in retirement. [JR1] Longer life spans have created several new issues that need to be taken into consideration when planning for retirement.
Lifetime Income Need
There actually is a lifetime after retirement and the need to be able to provide for a steady stream of income that cannot be outlived is more important than ever. With the prospect of paying for retirement needs for as many as 20 to 30 years, retirees need to be concerned with maintaining their cost-of-living. Utilizing correct tools can help ensure the money lasts as long as you do.
Health Care Needs
Longer life spans can also translate into more health issues that arise in the process of aging. The federal government provides a safety net in the form of Medicare, however, it may not provide the coverage needed especially in chronic illness cases. Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today. While taxes are the largest expense in retirement (hence our strong focus on tax-free retirement strategies), long-term care costs are a very close second.
Planning for the transfer of assets at death is an important element of retirement planning especially if there are survivors who are dependent upon the assets for their financial stability. Planning for estate transfer can be as simple as drafting a will, which is essential to ensure that assets are transferred according to the wishes of the decedent. However, for many, a will is not good enough. A living trust is often a valuable planning tool. Larger estates may be confronted with settlement costs and sizable death taxes which could force liquidation if the proper planning is not done.
Paying for Retirement
Retirees who have prepared for their retirement usually rely upon three main sources of income: Social Security, individual or employer-sponsored qualified retirement plans, and their own savings or investments. However, without proper planning, the IRS may stand to substantially benefit from your retirement income. A sound retirement plan will emphasize tax-free strategies as the primary sources of retirement, with qualified retirement plans (such as 401K/IRAs) used cautiously, and Social Security as a base for steady income. If done right, it is possible enter the 0% tax-bracket upon retirement, achieving 4 or more sources of tax-free retirement income (including social security and portions of 401K/IRA distributions).
In many cases, the old advice that says to max out a 401K or IRA has been shown to be harmful for retirees. The theory that retirees will somehow be in a lower tax bracket, or tax situation, when they retire has largely been defunct. After all, if you were to ask 100 of your family and friends if they believed that taxes will be lower of higher in the future, what would they all say? Another questions tob ask is, “will the government will need more or less money in the future?”
Simply put, we believe that taxes will be higher in the future because of math. Our country’s balance sheet demands it. Therefore, deferring taxes until the future, when taxes will likely be higher, is not a sound plan. If an employer offers a match, it is usually advisable to take the match. However, investing above what is required to get the full match, or where no match is offered, is often a process of creating a potential tax bomb later in retirement that may be very difficult to diffuse. Qualified retirement plans, such as 401Ks and IRAs, are designed to maximize the amount of taxes you pay over your lifetime while offering to lowers your taxable income in the current year.
Significant care and analysis should be undertaken before participating in a qualified plan. Considerations:
- Do you believe the government will need more money in the future?
- Do you believe taxes are likely to rise overtime, as a trend?
- Do you anticipate that you will lose deductions in retirement, as most do?
- Do you accept giving up lower, long-term capital gains tax treatment for the higher short-term capital taxes by participating in pre-tax retirement plans?
- Would you rather pay taxes now, when you have deductions and know what you tax rates are, in exchange for having your gains be tax-free in retirement?
Answers to these considerations can help guide you to the proper retirement vehicle in your situation. We can help.