Financial Matters

Where Will My Retirement Income Come From? 

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Retirement, something all clients think about and yet few understand. When asked about their biggest money concern, most want to know how much income they will have in retirement? It is a simple question but the answer is not simple. The truth is most Americans are not saving nearly enough for retirement. According to the Federal Reserve as of 2013 the median retirement savings for someone in their 30s is $45,000, their 40s is $63,000, their 50s is $117,000, and their 60s is $172,000 (Transamerica Center for Retirement Studies, May 2015).  But don’t use those numbers as a guide for your own future, because these numbers are woefully low.

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Consider that money saved during your working years must now produce an income stream for the rest of your life, a daunting task! Some retirees will be able to supplement their own savings with pension income, but more and more companies are moving away from offering pensions. Another source of income for retirement is Social Security but according to the Social Security Administration the average retirement benefit is $1368 a month or $16,416 a year. With fewer paying into the system and more and more baby boomer reaching retirement age the Social Security Administration states benefits will only be fully covered until 2034 (www.ssa.gov).

With two traditional sources of retirement income at risk, it is even more important for people to save on their own. As Benjamin Franklin once wrote, “but in this world nothing can be said to be certain, except death and taxes”, therefore how your retirement income will be taxed should be of paramount concern when deciding where to save.

A common retirement saving strategy is putting money in a qualified account. What does that mean? A qualified account is one where the contributions and earnings can be tax deferred until the money is withdrawn. Examples of these types of saving buckets are an IRA, 401(k), or 403(b). In the short run this may seem like an attractive strategy because it allows the contributions to be deducted from your income, thus reducing your taxable income and your tax burden for that year. Most people love the idea of paying fewer taxes at the end of the year.

If you have money accumulating in a 401(k), IRA or other tax deferred bucket take a look at your statement. How much of that will you get to keep and how much will go to the government? Right now there is no way to know. It is important to know that some of the money in the account will go to pay the taxes in the future, so it is not all your money to spend. Using buckets that defer taxes until later is like entering into a business partnership with the government. The only problem is not knowing how much of the bucket will go to your partner.

Most people don’t think about it that way. When planning for retirement this is an important part of planning, estimating how much you will actually get to keep. What assumption about taxes have you made? Do you think taxes will go up, down or stay the same in the future? Why do you think that? If the assumption is that taxes will stay the same then paying taxes now or later won’t matter. If the assumption is taxes will decrease then all the more reason to wait and pay them later. If taxes go up then more taxes will be paid by waiting. What you believe about taxes should drive your retirement savings decisions.

The next important step is to understand when you will get to spend the money. When you put money into a qualified account you agree to the terms. The money will be tax deferred until later, but it also is not freely accessible. The first number to know is 59 ½. That is the age when money can be withdrawn from these accounts without a penalty. If you want or need the money before that age then the government will impose a 10% penalty except under a few
exceptional circumstances. Since most people will need to work longer than 59 ½ this isn’t a big concern. However, if emergencies arise and money is needed then paying the 10% penalty will be an increased burden.

The next number to know is 70 ½. Let us say you are living happily in retirement with no need to withdraw from the IRA you accumulated while working. Perhaps you have a pension or part time employment such that withdrawals are not needed. The thought might be to pass this IRA money onto heirs. Well some of it can be passed on, but the government still wants the taxes owed so it imposes a requirement that even if money is not needed, money must be withdrawn and taxes paid on the withdrawal. This must happen each year beginning at age 70 ½. Furthermore, if that required minimum distribution or RMD is not taken, the government imposes a 50% penalty. Uncle Sam is serious, he wants his share of the money that you have so diligently saved.

Planning now to create retirement income is complicated by many factors both in and out of your control. Will there be income from a pension? How much income from Social Security? How much from personal savings? Wherever you decide to save, understanding the options and the corresponding rules is important. Assumptions about taxes should drive your decisions as well as when you will need the money. If the goal is to have as much money as possible to spend in retirement then these should be some of the questions considered to maximize your retirement income.

Asalyn Coachman is a Registered Representative of and offers Securities through The O.N. Equity Sales Company, Member FINRA/SIPC, 39395 W Twelve Mile Rd., Ste 102 Farmington Hills, MI 48331 (248) 482-3600.  Investment Advisory Services offered through O.N. Investment Management Company and FAI Advisors, Inc.  Financial Architects, Inc. and FAI Advisors, Inc. are not subsidiaries or affiliates of The O.N. Equity Sales Company or O.N. Investment Management Company.

Asalyn earned a degree in Economics from Harvard University and a law degree from the State University of New York at Buffalo. She lives in Lake Orion with her husband and two children where she is active in organizations such as the Harvard Club of Eastern Michigan, Lake Orion Schools, and the Baldwin Center of Pontiac, Michigan, where she serves as board president.

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