When coaching people on how to prepare for retirement I’m reminded of a line from an Army cadence, “They say that in the Army the pay is mighty fine; they give you a hundred dollars and take back ninety-nine.” One of the keys of a successful retirement plan is limiting taxes. Think about it, you’ve already paid taxes on the money you earned while working. You may have paid taxes on the growth of some of your investments each year and for some taxes on an inheritance you received. It makes you wonder how many times Uncle Sam can tax a dollar!
While I could write an article about my opinions on taxes that would make the newspaper weight over 27 pounds, I’ll keep this short and focused on your retirement. It’s important to remember that in retirement you are no longer receiving income from working at a job, but rather from your investments, pension (if you’re lucky) and social security. Avoiding taxes on your retirement income helps you maximize your lifestyle and avoid running out of money – a big fear for many retirees. So how can you build a plan that limits taxes, keeps money working for you and that fits your life?
Here are a few considerations:
Defer Taxes – Hopefully you have most of your money in qualified accounts (401k, 403b, IRAs). These accounts allow taxes to be deferred until you withdrawal money from the account. Note: You can’t defer forever, Uncle Sam does want his taxes! Required Minimum Distributions (RMDs) are required when you reach age 72. You may also consider alternative qualified accounts such as annuities, which are also tax-deferred, to protect against loss by a market downturn and can provide a lifetime income. NOTE: If you have a Roth IRA, there are no RMD’s and will continue to grow tax free.
Tax Advantaged Accounts – If you have non-qualified money sitting in banks, CD’s or other accounts earning minimal interest, consider investing. Money above and beyond short-term needs and adequate emergency funds can be invested into tax advantaged accounts. There are various types of annuities, which can protect your money from loss in a market downturn and provide higher rates of return compared to bank accounts. If you are in a high tax bracket you could consider municipal bonds among other strategies to reduce or eliminate the tax bill.
Future Needs – As we age, medical costs increase and sometimes moving to an assisted living facility may be necessary. It’s important to maximize the benefits of investments available to you today to preserve your retirement savings while at least keeping pace with inflation. Having a well-diversified portfolio and an income plan will give you confidence to enjoy your hard-earned retirement.
It’s important to remember that everyone’s situation is different so a licensed financial coach/advisor can help you build a plan that fits your life. Taxes are just one of the considerations when developing a strong financial plan so an advisor can give you an objective view and make sure you are on track for your future as well as providing the income needed today.