It’s Not What You Earn that Matters, It’s What You Keep
For decades, your paycheck has come from your employer. FICA, FUTA, SUTA, federal and state taxes have been deducted. You learned to live on the net proceeds for years. But in retirement, many seniors will need to manage their taxes themselves or outsource them to a tax preparer. For most retirees, the biggest annual expense in retirement will be taxes.
Watch the interview with Kevin Bard, Investment Advisor, Charter Federal Employee Benefit Consultant and author of “The Retirement Umbrella.”
For the vast majority of American seniors, you’re down to two income streams: Social Security and your own assets. You can begin to draw Social Security at age 62, but for every year you can delay Social Security from age 62 to your full retirement age (FRA), your payment will increase plus any cost of living adjustments credited. If you can wait until age 70, do it. It can make sense to delay Social Security, even if it means tapping into your own assets.
The bottom line is we can’t just look at the income you can generate from your savings and investments. We have to look at the take-home pay from that income. Just as when you were working, when you made $1,000 in a week, you didn’t take home $1,000. After taxes and all the other things that come out of your paycheck, what did you take home? Well, it’s the same way in retirement. When you take money out of an IRA, you have to pay taxes on it. And when you pay taxes on it, it’s going to reduce the amount of money you’re going to be taking home.
Whenever you take a look at how much you’re going to need in retirement, you have to take into consideration taxes and inflation, because your income needs to keep up with both of those. How can we be sure your take-home pay is exactly what you need? Remember in retirement, a dollar is not a dollar, and $50,000 is not $50,000. What it will be depends on what your tax bracket will be. We can’t know exactly what your tax bracket will be in retirement, and my gut feeling is tax brackets will be going up. I don’t want to see that happen, but I think it’s likely, given the amount of debt the country has.
The retirement take-home pay must support your standard of living after all those taxes are considered. But you also have to account for inflation. When people get a pension, they normally receive a specific amount of money every month, but most pensions do not factor in inflation. They stay flat. I see very few pensions that have an inflation factor tied to them. What does that mean for you?
Let’s say your pension is $2,000 a month. Well, in 10 to 20 years, $2,000 is not going to buy the same goods and services it does today. So the purchasing power of your dollar may be diminished due to inflation. Both taxes and inflation can wreck havoc in retirement.
(This press release contains segments from chapter one of “The Retirement Umbrella.”)
Syndicated financial columnist Steve Savant interviews Investment Adviser Representative and author of the Retirement Umbrella Kevin Bard. Right on the Money is a weekly financial talk show for consumers, distributed as video press releases to 280 media outlets and social media networks nationwide.