All in Retirement Planning

Tax Planning for Retirement – Roth Benefits

After years of saving and planning for their golden years, many people nearing retirement fail to consider the tax burden they may face on income they receive after they stop working. While you may see a reduction in the amount of taxes you owe after the age of 65, you still need to plan ahead if you want to minimize your tax bill from the IRS.  

Social Security Benefits

Depending upon your total income and marital status, a portion of your Social Security benefits may be taxable. For a rough estimate of your potential tax liability, add half of your Social Security benefits to your projected income from all other sources. This figure is your adjusted gross income (AGI), plus any tax-free interest income from municipal bonds or foreign-earned income. Up to half of Social Security benefits are taxable if this sum, which is called your provisional income, exceeds $25,000 for singles or $32,000 for married couples filing jointly. However, up to 85% of Social Security benefits are taxable if your provisional income is above $34,000 for single filers or $44,000 for married couples filing jointly.

Use the Social Security Benefits Worksheet in the instructions for IRS Form 1040 to calculate the exact amount of taxes owed. Rather than writing a large check once a year, you can arrange to have taxes withheld from your Social Security benefits checks by completing Form W-4V and filing it with the Social Security Administration.

Other Income Sources

In addition to collecting Social Security benefits, most retirees receive their income from a variety of sources, including distributions from 401(k) accounts and individual retirement accounts (IRAs); payouts from company pensions and annuities; and earnings from investments.

Contributions and earnings growth are tax deferred on 401(k)s and traditional IRAs; however, distributions from these accounts are fully taxable, but have no penalties if withdrawals are made after age 59½. If you have savings in 401(k) accounts or traditional IRAs, you must begin making withdrawals from these accounts—and paying taxes on the distributions—by April 1 of the year following the year in which you reach age 70½. If you are at least 59½ years old and have owned a Roth IRA or Roth 401(k) for at least five years, withdrawals are completely tax free. There are no minimum distribution requirements for Roth accounts.

Strategies to Minimize Taxes

Most retirees with nest eggs or pension income of any size will pay at least some taxes on their retirement income, but there are strategies to reduce the amount owed. While it usually makes sense to delay taking taxable distributions from retirement accounts until the funds are needed, or until distributions are required, you may want to withdraw more funds in tax years when claiming a large number of deductions temporarily lowers your tax rate. You may, for example, choose to take advantage of itemized deductions, such as the breaks for medical expenses or charitable gifts, in certain years, while taking the standard deduction in other years.

A desire to leave a portion of your assets to your family may also influence how you handle withdrawals from tax-deferred accounts. Keep in mind that, if you leave behind funds in a traditional IRA, the rules for inheritance can be complex. To avoid these issues and make it easier to pass on your estate to family members, consider converting traditional IRAs to Roth IRAs. While you will have to pay taxes on the funds converted, moving to a Roth IRA eliminates future tax liabilities, regardless of whether you use the funds in retirement or pass the money on to your heirs.

Time IN the Market > TimING the Market

The belief that you, or a particularly talented financial manager, can foresee the direction of the stock market is a seductive one. Some investors are confident that, with proper research, they can make money by snapping up equities when prices are low, and shifting their investments into cash or bonds when the market hits its peak. Even worse, they believe they can pay someone else can do it for them. But longitudinal studies have shown time and time again that no one can consistently predict the direction of the market in the short run.

However, many armchair investors persist in the belief that, by carefully following business news and trusting their “gut” instincts, they will be able to beat the market. Some study the stock tips in personal finance magazines, others hope to glean additional insight from analysts’ reports and specialized investment newsletters, and still others attempt to mine all the available data, crafting complex simulations of how the market is likely to behave in the future.

But if financial professionals struggle to keep ahead of trends, private investors are even less likely to outfox the indexes. As soon as a piece of business or economic news hits the airwaves and the Internet, analysts and brokers react immediately to the information. Because these financial professionals act so rapidly, the stock market almost always reflects all the known information at any given moment in time. And even if an individual investor were able to develop an analytic model with some real predictive value, unexpected events—such as a terrorist attack or a natural disaster, or even a political scandal—could lead to sudden and dramatic market fluctuations that no model based on historical data could have anticipated.

It is only natural that investors would want to find some way to sit out bear markets and get back just in time for the next bull run. It is useful to keep in mind, however, that even the slowest equity markets have some bright spots. A diversified portfolio will help you protect against loss and capture whatever gains might occur in a market downturn.

Investors run a big risk by selling when they believe stocks have reached their peak. They may turn a profit when cashing in their equity holdings, but they could also miss out on some of the market’s best cycles. Being absent from the market for only a few of the days or weeks with the highest percentage gains can decimate a portfolio’s returns over time. Market timers who sell frequently also lose money to transaction costs and taxes, and miss out to a large extent on the compounding effect that benefits investors who remain in the market consistently. Instead of trying to time the market, investing in a properly allocated diversified portfolio driven by a goals-based financial plan is a much better strategy.

Trying to pinpoint the right time to invest in the stock market is an exercise in futility. If you have a longer period to save, owning equities provides the most effective hedge against inflation and taxation available. Since it is impossible to know where the market might go from here, it makes sense to start investing now and continue investing on a regular basis, regardless of market conditions. Remember: long-term investment success is achieved not by timing the market, but by time in the market.

Study Shows Delaying Retirement May Increase Longevity, Especially for Men

In October, the Center for Retirement Research at Boston College published a research paper showing how policies in the Netherlands that delay retirement can increase longevity, especially for men. The working paper, “How Does Delayed Retirement Affect Mortality and Health?” was written by research economists Alice Zulkarnain and Matthew S. Rutledge. The authors observed that older Americans have been retiring later for a number of reasons, including because work is becoming less physically demanding, employers have shifted from defined benefit to defined contribution pensions, and Social Security’s incentives are changing. The researchers cautioned, however, that understanding the implications of working longer for mortality and health is complicated, because people who are healthier tend to work longer than people who are less healthy.

Taking advantage of a natural experiment in which a policy was implemented in the Netherlands that incentivized a broad cohort of early baby boomers in their sixties to delay retirement, the study used Dutch administrative data to explore the links between work and health outcomes related to depression and diabetes, applying an instrumental variable approach that took into account the joint relationship between work and mortality.

The findings showed that delayed retirement reduced the five-year mortality rate for men ages 62-65 by 2.4 percentage points, which represents a 32% reduction relative to the five-year mortality rate for non-working men of the same age. For women, the results were inconclusive.

Moreover, the study found no significant relationship between delayed retirement and health conditions like diabetes or depression, which suggests that these conditions were not responsible for the mortality reduction. The researchers speculated that this could be because depression and diabetes are not as acutely life-threatening as some other conditions, adding that further research is needed to identify the conditions through which the positive effect of working on mortality manifests itself. They also pointed out that the relationship between working and mortality could manifest itself through a variety of conditions, which may make it difficult to find a significant result for any one condition.

In some ways, the U.S. already has a delayed retirement incentive with the Social Security benefits program. That’s because every year someone delays taking their Social Security benefit beyond their stated full retirement age, they get an 8% annual increase every year until age 70.

From a financial planning standpoint, working longer is one of the main ways someone can exercise control over whether or not they outlive their money. One takeaway I offer, is set yourself up to do work you enjoy. It’s much more likely that you will work longer if you have a sense of fulfillment or enjoyment in the work you do. And, if you begin putting steps in place to transition to work you enjoy now, it’s more likely that you will make the leap successfully when the time comes.  

#AquilaWealth Newsletter -- No. 1 #IRA Mistake, Productivity Recommendation, and Jet Lag

I like to send out a newsletter to my clients and friends every-other week on Thursdays at 2 p.m. PT. I typically include 3 articles with my commentary around the topic of personal finance. Here are the ones I like this week, and I think you will too. (Feel free to email me at eric@aquilawealth.com if you want to be added to my email newsletter list.)

#1 The No. 1 IRA mistake

#2 Productivity Recommendation: Take the Kolbe A™ Index/Instinct Test

#3 The Scientific Secrets to Preventing Jet Lag

Countdown to Retirement: Strategies for Saving in Your 50s #retirement #aquilawealth

Strategies for saving in your 50s

Many retirees today are redefining the “golden years.” Forget about endless days of leisure. Retirees seek adventure, travel, and new business pursuits. While these changes may redefine retirement, will retirees be able to finance their plans? Today, many people age 50 and older have not begun to save for retirement or have yet to accumulate sufficient funds.