Retirement Planning

How much income do you need to maintain your current lifestyle in retirement?

The general rule of thumb is to figure that you will need approximately 80% of your current annual income in retirement. Even though I’m not a fan of this generality,but most people underestimate how much money they will need in retirement.

Here are some common mistakes people do when planning their retirement.

Paying too much tax on your Social Security benefit.

The key here is your “provisional income.” “Provisional income” includes regular taxable income, plus municipal bond interest (which is supposed to be tax-free), plus 50% of your Social Security benefit. If you’re single, you’ll pay tax on half your Social Security if your provisional income tops $25,000, and you’ll pay tax on 85% if your provisional in come tops $34,000. If you’re married filing jointly, you’ll pay tax on 50% of your Social Security if your provisional income tops $32,000 and you’ll pay tax on 85% if it tops $44,000.

If you’re stuck paying tax on your benefits, you may be able to avoid it by restructuring your income in ways that don’t add to provisional income. We’ve already seen that supposedly “tax-free” municipal bonds may not be the answer. But:

• Permanent life insurance lets you draw tax-free income from loans and withdrawals.
• Immediate annuities to offer partially tax-free income equal to your “exclusion ratio.”
• Fixed and variable annuities accumulate income without generating taxable interest,dividends, or capital gains.
• You can consider “tax-advantaged income generators” such as real estate, oil and gas, and equipment leasing programs that use depreciation and depletion deductions that avoid increasing “provisional income”.
• Transferring your assets to an IRA can be a smart move – but you still need to protect youraccount. You may be surprised to learn just how much you can lose.

Choosing right IRA. Here is what people often overlook:

• Minimum required distributions.

  Have you ever wondered why your IRA custodian sends out a statement every yearreporting your account balance to the IRS? It’s so they can make sure you take outeverything you’re supposed to.

  Since IRAs and qualified plans are intended for retirement, you have to start taking moneyout of regular IRAs and qualified plans by a specified required beginning date.

  Your distributions are taxed as ordinary income, unless you’ve made any nondeductiblecontributions. Distributions do count towards provisional income, so watch out if you’retaking Social Security!

• Wrong IRA.

  Minimum required distribution rules may wind up forcing you to take distributions and paytax on income you don’t need. Traditional IRAs let you deduct your contributions going in, but make you pay tax oneverything coming out. The Roth IRA flips this pattern on its back. There’s no deduction forcontributions going in – but no tax on income coming out!

  You can convert your existing regular IRA to a Roth IRA. But deciding whether to actuallydo it isn’t easy. It depends on two more questions.

  • First, what is your tax rate today, compared to where you expect it to be when you start taking money out of your account? You can’t know for sure, of course. But it makes sense to pay the tax today if you expect to save more tax than you would pay when you take the money out of the account.
  • Second, where will you find the money to pay the tax? You’ll do better, in the long run, if you pay it from outside assets. This effectively lets you trade the after-tax dollars you use to pay the tax into tax-free Roth growth. (If you’re under age 59½, you’ll owe an additional10% penalty tax on the part of the account you liquidate to pay taxes.)
  • Finally, how long can you let the account grow? You have to leave the assets in the account for at least five plan years to get tax-free treatment.

  Our firm is offering true tax planning to avoid costly mistakes and enjoy your retirement to the fullest.