Spring/Summer 2000 TAX NEWS 2000
In this issue of the TAX CLIENT NEWSLETTER we are
going to tackle some of the most commonly asked questions that will help you
get your financial act together. Learn how to evaluate your current money
situation and get the most out of your savings, budget, bank accounts
and investments. Is retirement looming on the not‑too‑distant
horizon`? Are visions of golfing all day or vacationing in Tahiti beginning to
fill your daydreams at work? Are you
planning to return to school or to start your own business after retirement`?
If so, you need to do some serious planning. Whether you intend to retire in
one year, five years, ten years or later, you can take steps now that will help
you reach your goals.
In this issue of THE TAX CLIENT NEWSLETTER we will
help you chart a course for your retirement by offering some suggestions for
evaluating your income sources and managing your assets. We have even included
a handy worksheet to help you determine what you should accumulate .
If you are close to getting that gold watch, it's
essential that you figure out just how much you'll need during retirement and
whether your investments and other assets can provide the income to cover the
expenses. One rule of thumb is that you will need 70% to 80% of your pre‑retirement
income during retirement ‑ but this is not a hard and fast rule. Your
situation could be radically different from the "average" taxpayer.
That's why you will need to put together a realistic budget based on your goals
and finances.
Lets start with a series of assumptions that most of
us can agree on. In order to reach a general agreement, we will avoid entering
into the debate on the future of Social Security. We will assume that some form
of Social Security will be there and that our government will keep its
commitment to us. Here are some suggested “safe”
assumptions:
Assumption 1: Turning your retirement dreams into reality takes careful planning.
Assumption 2: It is never too early or too late to get started.
Assumption 3: Americans are living longer.
Assumption 4: Company-sponsored benefits
may need replacing after retirement.
Assumption 5:
Inflation doesn't retire.
Assumption 6: No one retirement plan fits
all taxpayers.
Assumption 7: Your tax professional is in
a position to answer your questions and make suggestions regarding your individual needs.
Now, lets get started. Yes, we are living longer.
Men and women 65 years old today can expect to live to nearly 81 and 84,
respectfully. Remember that these are averages only and you should count on
living longer. More American workers are planning and saving for retirement but
their efforts may fall short because they often underestimate how long they'll
live.
Many taxpayers are covered by company‑sponsored
benefit plans. But, these individuals (and others) may need to purchase
"Medigap" insurance or a Medicare managed care plan to cover the
numerous routine expenses not covered by Medicare. Many taxpayers today are
investing in long‑term care insurance to cover the potential expense of
nursing home care. So, the future cost of health and life insurance needs to be
considered.
As you begin to evaluate your expected income flow,
consider when you will start drawing on Social Security. If you begin receiving
Social Security at age 62, your monthly benefits will be about a quarter less
than if you‑ had waited until "normal retirement age." One of
the recent changes to Social Security has been to raise the retirement
eligibility age for younger workers.
Conversely, the longer you wait past the “normal retirement age” the
higher the monthly benefits. For each
year you delay, up to age 70, your benefits can increase by up to 8%. On the
other hand, if you start withdrawing early, your extra years of receiving
Social Security may outweigh the lower monthly benefits.
Today, by law, the Social Security Administration
must send you an annual report concerning your "anticipated"
benefits. The statement is sent to you in advance of your birthday (6 months
ahead). It is critical to review and keep these statements for current and
future reference. If you need to get a replacement statement your can call the
agency at 800‑772-1213.
Please be aware that Congress and the President only
recently agreed to repeal the earnings limits placed on taxpayers between the
ages of 65 and 69. Previously, benefits were reduced $1 for every $3 of
earnings over $17,000 a year. Unfortunately, the legislation doesn't affect the
more‑stringent earnings limits for Social Security recipients age 62 to
65. The number of working senior citizens will undoubtedly increase now that
the federal government has made it easier to work and collect Social Security
benefits.
If your assets, pension, and Social Security
benefits are not enough, retiring later or taking on a part‑time job may
help to bolster your income and retain certain company‑sponsored
benefits, while letting your nest egg or a good portion of it grow a few more
years untouched.
Other issues that are certain to require your
attention include:
1) Should 1 pay off the home mortgage or other loans
before I retire?
2) Should I consider selling our home and move in to
a smaller home or relocate to a less‑costly area? Keep in mind the
current "sale of a principal residence" rules allow you to keep (tax
free) a substantial portion if not all of the gain on the sale of your home;
3) What pension payout should I elect-lump sum,
periodic payments, rolling it over to an annuity or IRA?
4) Should I consider converting my existing
traditional IRA to a ROTH IRA?; and
5) Are there any potential
estate tax traps that I can take steps to avoid now'?
Before we get to the
worksheet (have a pencil and calculator handy) consider six critical questions
that each of us should think about from time to time. Once you have completed
the Retirement Planning Worksheet you will be in a better position to go back
and review these questions:
+ How can I
estimate my annual retirement expenses?
+ What can I expect to be
eligible for from Social Security'?
+ What can 1 do now to help
me reach my goals'?
+ What is my retirement portfolio
worth now?
+ Does my current investment
strategy match my objectives`?
+ Am I doing all I can to
minimize the impact of taxes and protect against inflation?
Retirement Planning
Worksheet
Note: For the first 10
lines, estimate your annual post‑retirement expenses in today's dollars.
To be on the safe side, we've assumed that you'll live a very, long life ‑
until the age of 92 ‑ and that you will earn a very modest 8% annually on
your investments. We've also assumed a relatively high rate of annual
inflation: 5%.
$ _________ I> Housing
(include insurance, utilities, property taxes, furnishings.
$ __________2>Food (include meals away from home)
$___________3>Transportation
$___________4>Taxes
$___________5>Clothing, personal care
$___________6>Medical Expenses (including health insurance)
$___________7>Entertainment,
recreation, vacations
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Page 4
$_________8>Debit
payments
(including credit cards)
$_________9>Savings
$________10>Other
(including life insurance and disability insurance)
$________11>TOTAL ANNUAL
EXPENDITURES IN RETIREMENT (add lines 1 through 10)
$________12>Your expected Social Security and
pension income
$________13>Annual
retirement income you will need from savings and investments (subtract line 12
from line 11)
$________14>How
much you must save by retirement (Multiple line 13 by Factor A below)
$__________15>How much you’ve already saved (including tax-deferred accounts
and the total
amount you expect
your employer to add to them before you retire)
$________16>Inflation-adjusted
value of your savings at retirement (multiply line 15 by
Factor B).
$________17>Total
retirement capital you still need to accumulate (subtract line 16 from
line 14).
$_______18>HOW
MUCH YOU MUST SAVE EACH YEAR UNTIL RETIREMENT
(multiply
line 17 by Factor C)
AGE AT RETIREMENT/FACTOR A:
55 56
57 58 59 60
61 62 63 64
22.2 21.8 21.5 21.1 20.8 20.4
20.0 19.6 19.2 18.8
65 66
18.3 17.9
Factor B: 1.09
1.30
Factor C: 0.324 0.098
Factor B: 1.56 1.81
Factor C: 0.054 0.037
Factor B: 2.09 2.43
Factor C: 0.027 0.021
Spring/Summer 2000
Page 6
The percentage of workers who say they have saved
for retirement has increased from 61% in 1994 to 76% today. The even better
news is that the number who have tried to calculate how much they will need to
save for a comfortable retirement has jumped to 53% from 35% in 1993. This
NEWSLETTER is an effort to help you make sure that your money lasts a lifetime.
In the next issue of THE TAX CLIENT NEWSLETTER we
will review the many tax‑favored retirement plans that are available
today. If you would like to be included on our mailing list for that issue
(late Summer) please drop us a note. As always, if there are any tax/retirement
issues that you would like to review with us, please do not hesitate to call
our office and schedule an appointment. We are here to serve you. Have a
wonderful summer.
Best Wishes...