Basic Considerations to Secure Your Retirement Plan and Prepare for Life Changes
Retirement age, like life, comes at you fast. Are you prepared?
So you want to plan and prepare for retirement - how do you start?
Most Americans plan to retire by 66 but must retire at 61. Why "must?"
Sometimes, the option to work well into the 60's is not available. Sometimes, an illness gets in the way. And on a good note, some people save enough money to retire early.
In either case, a robust retirement plan may shield you from financial insecurity and other challenges many seniors face.
We often speak with our clients about retirement accounts, plans and how a divorce may affect both. We think you will love this article and the perspective it shares. This article is not legal, tax or financial advice.
Golden years, interrupted
An advertising company coined the phrase "the golden years" in 1959 to promote a retirement community. The phrase implies life after retirement for Americans is a permanent vacation.
Reality check - retirement is not always a golden ticket to anything.
Seniors (those 65 and over) face significant financial, health, and housing challenges, such as the following:
- Almost 10 million seniors need to pay off a mortgage, home equity line of credit, or both.
- Approximately 7.3 million seniors experience food insecurity.
- About 61% of senior-led households had a median debt of $31,050.
- Nearly 36 million seniors accidently fall annually, with 32,000 succumbing to their injuries.
- Around 60% of seniors are living with at least two chronic conditions.
Racial minorities feel the worst of third-age challenges. For instance, most Black and Latinx seniors survive on incomes below 200% of the Federal poverty line.
Senior Black men are twice as likely to experience unemployment as their white counterparts.
Recent changes in the Tax Law may affect your Retirement Plan
We are not tax lawyers and this is not tax advice. However, hopefully after you read this, you may realize more than ever why it is so important to get tax advice from an experienced tax professional regarding your situation. What we write below is as of 2021.
The "Setting Every Community Up for Retirement Enhancement (SECURE) Act" became law for years beginning after December 31, 2019 and made many significant changes as to how retirement plans are created and taxed.
IRA contributions no longer have an age limit. You may make an IRA contribution at any age provided you have earned income and otherwise qualify. Taxable alimony is considered qualifying income for purposes of the IRA deduction. Many people who were divorced prior to 2019 still have taxable alimony agreements in place.
Other types of retirement plans and 401K's are available regardless of age for qualifying individuals. Be aware the State and Federal Tax Laws are not always the same—particularly in certain states such as California. And these laws can change dramatically from one year to another.
California has a high individual tax rate
California has one of the highest individual tax rates in the nation at 13.3% for those with seven-figure incomes. Even those with taxable incomes as low as $58,635 are taxed at a top rate of 9.3%.
Although California does not tax Social Security benefits, a significant amount of the social security income may be taxed on the federal return.
Likewise, California has no gift or inheritance tax, but the federal government taxes gifts and inheritance transfers at potentially 40%. Note that under current law there is a $11,700,000 individual gift and estate tax exemption. But again, these laws can change from year to year.
The newly installed Biden Administration has its sights on reforming the gift and estate tax laws, and the individual exemption may be significantly reduced for future years.
Therefore, wealthy individuals may very well be in the position of "use it or lose it" when it comes to the current robust estate tax exemption.
See what we mean? Get professional tax advice now regarding your situation.
Establish nest eggs to secure your retirement
Nest eggs are large sums of money and assets saved over time for a specific purpose, such as retirement, education, or real estate investments.
Tax-advantaged retirement accounts like a 401(k) or IRA grow money over time due to interest, and you can defer the tax payment.
Therefore, your investment has the most potential to grow the sooner you save and the more you save.
It is never too early to start your nest egg. If you haven't started yet, start today and strengthen your retirement plan through multiple assets, such as:
- Savings accounts.
- Certificates of deposits.
- Bonds.
- Money market funds.
- Mutual funds.
- Universal life insurance.
- Annuities.
- Exchange-traded funds.
- Low-risk stocks.
- Real-estate investments.
Adjust your asset portfolio and risk tolerance to your retirement needs
Your life expectancy is different at age 65 compared to age 40. Therefore, how your asset portfolio looks and how much risk you are willing to take should also look different.
For example, if you have $2 million saved in cash, is it wise to stick that money in savings and checking accounts? I suppose that may be "safe" (assuming you have it spread out to take advantage of FDIC insurance) but you may not see any return on your money and with inflation, those dollars may reduce in buying value.
Is it wise to take that entire $2 million and roll the dice in the stock market? That may result in big returns or big losses, right? Can you risk big losses when you are retirement age?
Where you place your assets and money matters and these are not decisions you should make without consulting with the right professionals.
Avoid planning your retirement alone
- A strategic retirement plan could be the difference between golden or gloomy years. Do your future a favor and seek expert advice.
- A financial advisor, certified personal accountant, or other financial professionals may increase your chances of an enjoyable retirement.
- Almost half of Americans reported the COVID-19 pandemic helped them realize they need financial management assistance.
- Obtaining professional advice can overcome any confusion surrounding your retirement. The expression, "knowledge is power" exists for good reason.
May you retire with a comfortable nest egg so those golden years can truly be golden.