May 2004 On-line Tax Planning
The Golden Years?
Now you've
reached retirement age, whatever that may be when it's your time to retire and
relax. How are you going to be able to afford
the lifestyle you would like to be accustomed to now that you have the
opportunity?
Let's make a few assumptions going into this article and then we will discuss
your options from there. First, let's assume you
have funded your 401(k) or other employer sponsored plan to the max over the
course of your working life. Assuming you
averaged an annual growth of 10% during that time, you have a few bucks stashed
away.
A second assumption we will make is both you and your spouse qualify for the
maximum benefits under your own earnings records. For
a married couple with both spouses retiring in 2004, that amount will equate to
approximately $1,784 monthly for each person. Rounded,
this means your Social Security Income will be approximately $43,000 per year.
A third assumption we will make is that you don't have any significant debts and
your children are out on their own.
Now that we have painted a best case scenario, let's
take a look at some of your alternatives.
Your first alternative is to live life to the fullest with no thought to
tomorrow. Your Social Security benefits will
provide you with a pretty good income even if you don't have other retirement
accounts on which to draw, but let's say you have built up $1.5 million in
retirement accounts and another $500,000 in other investments, excluding the
house. All things considered, you should be able
to live rather well with what you have stashed away.
Your money may even make it to the end of whichever spouse dies last, but be
aware that word "may" can be a pretty big hole in your retirement planning.
While your nest egg may seem good based on
"average" annual earnings, your earnings from year to year on the retirement and
investment accounts will fluctuate. If you're
not careful, you can wind up spending so much in the lean years that there is
little principal on which to earn investment income in the fat years.
Also, you need to remember that any withdrawals
from retirement accounts (assuming they are not Roth IRAs) will be taxable
income. This will definitely reduce the amount
of funds available for retirement.
If life is so uncertain, perhaps you should be the conservative investor and
live solely off of your Social Security benefits. This
is fine if you don't plan on living to age 70 1/2. In
the year you become 70 1/2, you will be required to start taking required
distributions. Assuming you live long enough,
you will start paying tax on retirement savings.
Your best strategy is likely to be a middle of the road approach.
First, make sure that your retirement accounts
are properly balanced with a more conservative mix of equities and fixed-income
securities. You are now in a position to start
seeking to minimize the market risk on your retirement savings.
You should also take a look at the
non-retirement savings and include it in the balancing of your portfolio.
From a tax perspective, however, it is best to
leave the regular investments alone if they carry a high value and low basis.
Looking at the big picture, you should be able
to move funds around in the retirement account(s) to achieve a more conservative
balance for your portfolio without incurring high tax costs.
It may also be time to annuitize some of your investment. While
annuities may not return as much as other investments, they can provide a steady
cash flow.
Let’s turn the tables a bit and assume you don't have large retirement accounts,
but you have been fairly successful in your after-tax investments.
If you are heading for retirement or are already
retired, you still need to look at having a conservative portfolio.
Since you won't be able to move all your
investments without a tax consequence (assume you have a gain in all your
investments), develop a plan to reallocate over a several year period.
This will help minimize your tax burden,
especially if you have assets that don't qualify as long-term capital gain
property.
In our economy, even $2 million can be spent rather
quickly, especially if you are in a nursing home or
incur high medical costs. For this reason, make
sure you have an appropriate long-term care policy. Take
the money you have been paying the life insurance company for your term policy
and use it for the long-term care policy. At
this point in your life, unless you have a very large estate, your needs to hang
on to the term life policies are most likely gone. You
don't need to provide a safety net for your children if you die and your estate
won't need the cash for taxes. Why not get a
policy that will preserve your assets for your spouse and the remainder of the
family?
While we are on the subject of insurance, let's talk about your Medicare
benefits. Unfortunately, Medicare has its
limits, especially in the drug arena. We suggest
you get a Medicare supplement policy that will pay for what the Medicare will
not cover.
Heading into retirement is a perfect time to verify that the beneficiaries on
any retirement accounts or insurance and annuity policies are those you intend
to benefit. This is especially true for people
in their second or subsequent marriage. This,
along with a properly drafted will and power of attorney should ease the
transition for your loved ones.
We sincerely hope that your finances are such that your retirement years are
sufficient to make your retirement years truly golden ones. If
you need assistance or simply want a second opinion on your planning, give us a
call. We are here to help.
Tax
Planning Archives
For More Information Contact:
Bucheri McCarty & Metz LLP
2366 W. Boulevard
P.O. Box 2147
Kokomo, IN 46904-2147
Telephone: (765) 236-2300
FAX: (765) 236-2333
Internet:
info@bmmcpas.com
