Written by Jason Alderman
If your retirement is not far off, you've probably already started to estimate what your living expenses will be after the regular paychecks stop. Most would-be retirees remember to include routine expenses like housing (rent or mortgage), medical bills and prescriptions, insurance premiums, transportation – even food and entertainment.
But don't forget to factor in taxes, which can have a substantial impact on your cost of living, depending on where you live and what your sources of retirement income will be.
Here are a few tax-related issues to consider when budgeting for retirement:
Social Security. Most people can begin collecting Social Security benefits as early as age 62, albeit at significantly reduced amounts than waiting until their full retirement age (65 for those born before 1938 and gradually increasing to 67 for those born in 1960 or later).
Although many states don't tax Social Security benefits, the federal government does. Depending on your "combined income" (adjusted gross income plus nontaxable interest earned plus half of your Social Security benefits), you could end up owing federal income tax on a portion of your benefit. It's complicated, but basically:
Single people whose combined income is less than $25,000 aren't taxed on their Social Security benefit. For combined income between $25,000 and $34,000, up to 50 percent of your benefit may be taxed. Over $34,000, up to 85 percent may be taxable.
For married couples filing jointly: benefits aren't taxable for combined income below $32,000; benefits for income between $32,000 and $44,000 are up to 50 percent taxable; over $44,000 – up to 85 percent taxable.
To learn more about taxation of Social Security benefits, read IRS Publication 915 at www.irs.gov.
Some people discover after beginning to collect a reduced Social Security benefit that they can't make ends meet and must go back to work, which can backfire: If your annual wages exceed $15,120, you will lose $1 of Social Security benefits for every $2 you earn over that amount (investment income doesn't count.)
Rest assured, however: These benefit reductions are not completely lost: Your Social Security benefit will be increased upon reaching full retirement age to account for benefits withheld due to earlier earnings.
IRA and 401(k) withdrawals. After age 59 ½, you can start withdrawing balances from your IRA without paying the 10 percent early withdrawal penalty – although exceptions are made in cases including disability, qualified first-time homebuyer distributions and certain medical expenses. However, you will pay federal (and state, if applicable) income tax on IRA withdrawals – except for Roth IRAs held at least five years, whose contributions have already been taxed.
With 401(k) plans, you can withdraw funds after age 55 without the 10 percent penalty if you are no longer employed by the company sponsoring the plan.
Other taxes. Some people move to another state after retirement thinking they'll lower their tax burden. For example, seven states do not tax personal income; however, another two tax only dividend and interest income. And five states charge no sales tax. But because other taxes and cost-of-living expenses vary significantly by community, you should only consider such moves after doing thorough research.
The Retirement Living Information Center (www.retirementliving.com) features breakdowns of the various kinds of taxes seniors are likely to pay, state by state, including those on income, sales, fuel, property and inheritances.
Bottom line: Be sure to consult a financial advisor long before retirement to make sure you fully understand all the many tax and income implications.
Last Updated on Tuesday, 16 July 2013 00:18
Written by Phil Cerroni
By Jason Alderman
Many people adopt a "penny wise, pound foolish" mentality when it comes to buying insurance. When trying to lower expenses, some will drop or reduce needed coverage, gambling that they won't become seriously ill, suffer a car accident or fall victim to a fire or other catastrophe. But all it takes is one serious uncovered (or under-covered) incident to potentially wipe you out financially.
Here are insurance policies no household should be without:
Medical. This is the most critical – and unfortunately, the most expensive – coverage you need. When comparing plans, consider:
Are your doctors in their provider networks? If not, can you afford out-of-network charges – or are you willing to find new doctors?
Are your medications covered under the plan's drug formularies?
Do they restrict specialized services you might need like maternity, mental health or weight reduction treatments?
If you choose catastrophic coverage to lower premiums, can you afford the high deductible in case of an accident or major illness?
Homeowner/renter. Faulty plumbing, theft and home-accident lawsuits are only a few catastrophes that could leave you without possessions or homeless. A few tips:
"Actual cash value" coverage repairs or replaces belongings, minus the deductible and depreciation, whereas "replacement cost" coverage replaces items in today's dollars. Depreciation can significantly lower values, so replacement coverage is probably worth the extra expense.
Jewelry, art, computers and luxury items usually require additional coverage.
Review coverage periodically to adjust for inflation, home improvements, new possessions, change in marital/family status, etc.
The market is competitive, so compare your rate with other insurance carriers. Get "apples to apples" quotes since policies may have varying provisions.
Vehicle. You probably can't even get a driver's license without demonstrating proof of insurance. Consider these coverage options:
"Liability" pays if you cause an accident that injures others or damages their car or property.
"Uninsured motorist" pays for damage caused to you or your car by an uninsured motorist.
"Collision" pays for damage to your car resulting from a collision and "comprehensive" pays for damage caused by things like theft, vandalism and fire. However, they only pay up to the actual cash value (ACV) minus deductibles. Because the ACV for older cars is low, repairs often cost more than the car is worth.
Common ways to lower premiums include: Raising deductibles; discounts for good drivers, exceeding age 55 or installing security systems; comparison shopping; and buying homeowner and car insurance from the same carrier.
Life insurance. If you're single with no dependents, you may get by with minimal or no life insurance. But if your family depends on your income, experts recommend buying coverage worth at least five to 10 times annual pay. Other considerations:
Many employers offer life insurance, but if you're young and healthy you may be able to get a better deal on your own.
After your kids are grown you may be able to lower your coverage; although carefully consider your spouse's retirement needs.
You probably don't need life insurance on your children, but you might want spousal coverage if you depend on each other's income.
If your divorce settlement includes alimony and/or child support, buy life insurance on the person paying it, naming the receiving ex-spouse as beneficiary.
Don't gamble your future financial stability by passing on vital insurance coverage – the odds aren't in your favor.
Last Updated on Sunday, 10 February 2013 21:45