What are the risks that affect your future income?
Business-Will you have a job tomorrow or as long as you want to work? If you are self-employed, will there be a market for what you do or sell? Will technology make you/your product outmoded?
Longevity- What is your family history? Are you healthy? We are living longer. Will your money last as long as you do?
Inflation-What will the future bring? How will it affect your future buying power?
Market-If you invest in the market, will it go up or down? The market has had major corrections in the past. If your income is based on market investments, you may not have the income you envisioned.
Health-You may be healthy today, but what will tomorrow bring? As we live longer, we have more chances of contracting some disease. What will the medical costs be in the future?
Government Programs-Social Security, Medicare/Medicaid, Welfare, LIS and more. Will some of these programs be eliminated or lessened?
Marital Status-Divorce? Death? How will that affect your future income?
All of these risks can affect your future income and your retirement plans. What have you done to ensure financial security so you don’t outlive your savings. Pensions, Social Security and annuities are the only incomes guaranteed for life. I can help you create an annuity to guarantee a secure income.
How 6 Types of Retirement Income are Taxed
How 6 Types of Retirement Income Are Taxed
Consider the tax tab your income sources will generate in retirement.
By Sandra Block, Updated January 2015, Kiplinger
One of the biggest mistakes retirees make when calculating their living expenses is forgetting how big a bite state and federal taxes can take out of savings. And how you tap your accounts can make a big difference in what you ultimately pay to Uncle Sam.
Conventional wisdom has long held that you should tap taxable accounts first, followed by tax-deferred retirement accounts and then your Roth. This strategy makes sense for many retirees, but be careful if you have a lot of money in a traditional IRA or 401(k). When you turn 70 1/2, you’ll have to take required minimum distributions (RMDs) from the accounts. If the accounts grow too large, mandatory withdrawals could push you into a higher tax bracket. To avoid this problem, you may want to take withdrawals from tax-deferred accounts earlier.
Here’s how retirement assets are taxed.
Tax-deferred accounts. Prepare to feel pain. Withdrawals from traditional IRAs and your 401(k) will be taxed as ordinary income, which means at your top tax bracket.
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Taxable accounts. Profits from the sale of investments, such as stocks, bonds, mutual funds and real estate, are taxed at capital-gains rates, which vary depending on how long you’ve owned the investments. Long-term capital-gains rates, which apply to assets you have held longer than a year, can be quite favorable: If you’re in the 10% or 15% tax bracket, you’ll pay 0% on those gains. Most other taxpayers pay 15% on long-term gains. Short-term capital gains are taxed at your ordinary income tax rate.
Interest on savings accounts and CDs and dividends paid by your money market mutual funds is taxed at your ordinary income rate. Interest from municipal bonds is tax-free at the federal level.
Roth IRAs. Give yourself a high five if your retirement portfolio includes one of these accounts. As long as the Roth has been open for at least five years and you’re 59 1/2 or older, all withdrawals are tax-free. In addition, you don’t have to take RMDs from your Roth when you turn 70 1/2.
Social Security. Many retirees are surprised—and dismayed—to discover that a portion of their Social Security benefits could be taxable. Whether or not you’re taxed depends on what’s known as your provisional income: your adjusted gross income plus any tax-free interest plus 50% of your benefits. If provisional income is between $25,000 and $34,000 if you’re single, or between $32,000 and $44,000 if you’re married, up to 50% of your benefits is taxable. If it exceeds $34,000 if you’re single or $44,000 if you’re married, up to 85% of your benefits is taxable.
Pensions. Payments from private and government pensions are usually taxable at your ordinary income rate, assuming you made no after-tax contributions to the plan.
Annuities. If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable. The insurance company that sold you the annuity is required to tell you what is taxable. Different rules apply if you bought the annuity with pretax funds (such as from a traditional IRA). In that case, 100% of your payment will be taxed as ordinary income. (If this is a ROTH, it grows tax deferred and comes out tax free!)
What is the next step?
Are you thinking of retiring abroad? Become an ex-pat? What are the issues?
Is the cost of living in the US too much for your retirement income? Do you want a comfortable lifestyle at an affordable price? Always wanted to try a different culture?
Choosing to live in another country has many areas to think about. First of all, what country and why? Beach? Inland? Cost of living is most likely the first concern. How about the language? What is the health care like and what are the costs and quality? How easy is it to get back to the US if you need to? Should you rent or buy? Mountains or sea shore? Live in an ex-pat community or with the locals? What is the infrastructure of the community? What are the tax implications for the US and your adopted country? Where will you keep the bulk of your funds? Who will take care of US issues for you? Do you renounce your US citizenship or apply for dual citizenship or residency? Is this a permanent home or a few months out of the year?
We subscribe to a publication called “International Living.” It is full of ideas on where to find your new home and why. It is written by retirees who are living in the location and gives a fairly good idea of the local scene.
Last month I wrote about starting your dream business. Is this a place where you can combine your dream business and dream location?
I have always thought I would live outside the US for the bulk of the year and try different cultures each year. Now my thoughts have changed and I want to be close to the children and grandchildren and they are all right here. As we travel the world, we are looking for a place better than our home in Colorado. So far we have found places where we would like to spend more time, but we are not ready to move.
What are your thoughts as retirement comes your way? Ready for a change or stay where you are? Retirement brings options and a chance to try something new. What will you choose?