Taxes obviously play an important part in planning the financial aspects of retirement. Keeping track of taxes owed and forms to be filed by certain dates is time-consuming. Federal, state, and local income taxes, school and real estate taxes, personal property, wage, and Social Security taxes, to say nothing of estate, inheritance, and gift taxes, must all be considered to insure that only the required minimum amount is paid. Fortunately, Federal and state income taxes on gross income are usually greatly reduced after retirement.
Federal income tax law allows you to double your exemptions after age 65 to $4000 for a married couple. You may also continue to reduce your taxable income by charitable contributions or other deductible expenses such as real estate and other taxes and loan interest. Under certain circumstances, no income taxes are due on the realized gain on the sale of a home up to $100,000.
Currently, all Social Security benefits are free of local, state, and federal income taxes, and probably will be free of most other taxes based on income. Company pensions are usually exempt from local and state income taxes, but are subject to Federal income tax. A company pension may be taxed, depending on the pension plan provisions and the way the money is paid.
Showing posts with label social security. Show all posts
Showing posts with label social security. Show all posts
Private Savings and How They Can Be Use
Other assets at retirement are the third leg of the stool. They might include savings in a savings account or money-market mutual fund, stocks, bonds, real estate or other property, cash values of life insurance contracts, income payable or cash values of annuities, amounts owed to you by others, and the market value of personal property you wish to sell.
It is best to enter retirement with an adequate cash reserve for emergencies and other unexpected expenditures. Most important financially, however, is a satisfactory annual retirement income. You may have to sacrifice some savings or other assets to attain the desired income level.
There is wide range of options for using savings. For example, you might put some or all life insurance contracts on a paid-up basis, thus lowering anticipated expenses rather than drawing from savings to pay the premiums. A reverse mortgage on your home will increase your mortgage and decrease your equity but add periodic payments from the mortgage company to your planned income. You can also liquidate other investments and reinvest the proceeds in a mutual fund which permits periodic withdrawals. The following example illustrates several options:
James Johnson retires at age 65. He owns his home, which has a market value of $75,000, and has savings accounts worth $15,000, $100,000 of life insurance with a cash value of $40,000, and stocks worth $10,000. His annual income prior to retirement was $25,000. His company retirement plan will pay him $5,500 a year during his lifetime, and then $2,750 to his wife, Vera, for her lifetime, if she survives him. Social Security will pay him $8,000 per year plus an additional $4,000 per year for Vera who is also 65. Their total retirement income for the first year, therefore, is anticipated to be $17,500.
Of his $25,000 gross salary before retirement, $20,000 remained after taxes. According to current tax law, no taxes will be due on any of his income after retirement, including savings account interest and stock dividends.
Therefore, his total retirement income of $17,500 equals about 88 percent of his $20,000 net income after taxes prior to retirement. He wishes to raise his post-retirement income closer to his pre-retirement net earnings without digging too deeply into savings and other assets.
His first decision is to stop paying life insurance premiums of $1000 annually and to use dividends on the policies to purchase paid-up life insurance. This reduces the principal amount of the insurance immediately from $100,000 to $70,000, to which will be added each year such amounts of paid-up insurance as dividends will purchase. By taking this step, he reduces his income needs from $20,000 to $19,000. His $17,500 retirement income is now 92 percent of his post-retirement goal.
Next, he sells stock for $10,000 which he invests in a money-market mutual fund, electing a 10 percent ($1000) annual withdrawal, payable monthly. If the money-market fund earns 10 percent each year, as many did in 1979, the value of the investment will remain at $10,000. If it earns more than 10 percent, the investment will grow. If it earns less, the investment will decrease. With this $1000 per-year withdrawal from the fund, retirement income increases to $18,500. However, about $100 in Federal and State income taxes will be due, so the net income is $18,400, or about 97 percent of the $19,000 goal. Withdrawing interest on savings yields $825, bringing the total spendable income to $19,225, or slightly over 100 percent of the goal.
These steps leave the equity in his home, the cash values of life insurance policies (which increase each year), the money-market fund, and the savings account. In the years ahead, withdrawals from one or more of these assets can provide more income to cover increasing expenditures due to inflation or other causes. Because of a reduction in work-related expenses and a fully paid mortgage, expenditures may be lower than anticipated, possibly freeing surplus funds for investment in savings or a money-market fund.
It is best to enter retirement with an adequate cash reserve for emergencies and other unexpected expenditures. Most important financially, however, is a satisfactory annual retirement income. You may have to sacrifice some savings or other assets to attain the desired income level.
There is wide range of options for using savings. For example, you might put some or all life insurance contracts on a paid-up basis, thus lowering anticipated expenses rather than drawing from savings to pay the premiums. A reverse mortgage on your home will increase your mortgage and decrease your equity but add periodic payments from the mortgage company to your planned income. You can also liquidate other investments and reinvest the proceeds in a mutual fund which permits periodic withdrawals. The following example illustrates several options:
James Johnson retires at age 65. He owns his home, which has a market value of $75,000, and has savings accounts worth $15,000, $100,000 of life insurance with a cash value of $40,000, and stocks worth $10,000. His annual income prior to retirement was $25,000. His company retirement plan will pay him $5,500 a year during his lifetime, and then $2,750 to his wife, Vera, for her lifetime, if she survives him. Social Security will pay him $8,000 per year plus an additional $4,000 per year for Vera who is also 65. Their total retirement income for the first year, therefore, is anticipated to be $17,500.
Of his $25,000 gross salary before retirement, $20,000 remained after taxes. According to current tax law, no taxes will be due on any of his income after retirement, including savings account interest and stock dividends.
Therefore, his total retirement income of $17,500 equals about 88 percent of his $20,000 net income after taxes prior to retirement. He wishes to raise his post-retirement income closer to his pre-retirement net earnings without digging too deeply into savings and other assets.
His first decision is to stop paying life insurance premiums of $1000 annually and to use dividends on the policies to purchase paid-up life insurance. This reduces the principal amount of the insurance immediately from $100,000 to $70,000, to which will be added each year such amounts of paid-up insurance as dividends will purchase. By taking this step, he reduces his income needs from $20,000 to $19,000. His $17,500 retirement income is now 92 percent of his post-retirement goal.
Next, he sells stock for $10,000 which he invests in a money-market mutual fund, electing a 10 percent ($1000) annual withdrawal, payable monthly. If the money-market fund earns 10 percent each year, as many did in 1979, the value of the investment will remain at $10,000. If it earns more than 10 percent, the investment will grow. If it earns less, the investment will decrease. With this $1000 per-year withdrawal from the fund, retirement income increases to $18,500. However, about $100 in Federal and State income taxes will be due, so the net income is $18,400, or about 97 percent of the $19,000 goal. Withdrawing interest on savings yields $825, bringing the total spendable income to $19,225, or slightly over 100 percent of the goal.
These steps leave the equity in his home, the cash values of life insurance policies (which increase each year), the money-market fund, and the savings account. In the years ahead, withdrawals from one or more of these assets can provide more income to cover increasing expenditures due to inflation or other causes. Because of a reduction in work-related expenses and a fully paid mortgage, expenditures may be lower than anticipated, possibly freeing surplus funds for investment in savings or a money-market fund.
Sources of Retirement Income
It has been said about the three sources of retirement income that, like a three-legged milking stool, support is needed from every one: Social Security, company or individual retirement plans (including Keogh and IRA), and personal savings.
Social Security
On retirement at age 65, you are entitled to Social Security benefits but must apply for them. Visit your local Social Security office with your Social Security card in hand at least four months before reaching 65 to get the wheels turning. Your first Social Security check will arrive within the first ten days of the second month after you retire. The amount will be automatically indexed to inflation. Assuming inflation continues, and depending on its severity, you can expect annual increases, probably in July. Also, after your first year of drawing Social Security benefits, you may receive a further increase due to recalculation of your benefits, taking your last calendar year's earnings into account. Your Social Security payment can be automatically deposited in your checking account at your request, for convenience and safety.
Social Security
On retirement at age 65, you are entitled to Social Security benefits but must apply for them. Visit your local Social Security office with your Social Security card in hand at least four months before reaching 65 to get the wheels turning. Your first Social Security check will arrive within the first ten days of the second month after you retire. The amount will be automatically indexed to inflation. Assuming inflation continues, and depending on its severity, you can expect annual increases, probably in July. Also, after your first year of drawing Social Security benefits, you may receive a further increase due to recalculation of your benefits, taking your last calendar year's earnings into account. Your Social Security payment can be automatically deposited in your checking account at your request, for convenience and safety.
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