Planning for Retirement With Your Spouse

When planning for retirement, you need to look at multiple sources of income and be sure that some of the income sources are tax-free. The more, the better. So, how do you plan for a retirement income stream that minimizes overall taxation?

Four Instruments that Provide tax-free Retirement Income

Here are four great ways to provide yourself with tax-free.

1. Roth IRA is a great retirement investment that can result in a steady stream of tax-free retirement income as long as they are considered qualified. However, you must qualify for an IRA and the requirements are adjusted year by year as is the amount eligible for savings. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

If you do qualify, money put into a Roth IRA is taxed when you receive it, so it is not taxed again when it is withdrawn. In 2018, the eligibility requirements are:

1. Single or head of household, earning less than $120,000 to fully contribute to a Roth IRA.
2. Married filing jointly or a qualified widow(er) earning less than $189,000 to fully contribute to a Roth IRA.
3. Married filing separately earning less than $10,000 to fully contribute to a Roth IRA. (Note that those married but filing separately can use the limits for single people as long as they have not lived with their spouse in the past year)
4. Municipal Bonds and Funds provide income distributions not taxable by the federal government though they are may be subject to state income tax. Because they are not subject to federal income tax, interest paid on these bonds is typically less than taxable bonds.

There is no income limit to investing in tax-free municipal bonds and funds.

3. Health Savings Accounts (HSAs) are available if your employer offers health insurance using an HSA. Combined contributions by the employer and employee to this account as of 2018 can be as high as $6,900.00 for qualifying plans.

Following the rules about which expenses are reimbursable, no taxes are paid on withdrawals.

In addition, the HSA funds and earnings can be held until retirement then uses to provide tax-free income by reimbursing the holder for past and current allowable expenses which include Medicare premiums.

4. Roth 401(k) or 403(b) allow Roth contributions inside these accounts making those contributions and their subsequent retirement earnings, tax-free. These accounts are not subject to income eligibility limits but they are subject to taxes in the year that contributions are made.

Making the Most of Your Home

Another way to make a smart investment for your retirement is to pay off any mortgage that you have on your home before you retire which allows you to live in your home for the cost of property taxes and home insurance alone.

For many retirees, this is a huge reduction in their monthly expenses allowing the money be used elsewhere.

Approaching retirement can sometimes be as overwhelming and nerve-wracking as the transition into your Golden Years. You may start reflecting on what you’ve accomplished thus far in life and what you envision still achieving.

As you near the finish line, here are four things to do in the last ten years of your career.

Create a List of Things You Want to Accomplish in Retirement

The first step is understanding your goals for your retirement. What lifestyle do you envision maintaining? Will you travel? Will you live in the same home? What will you do during the day? As much as you may enjoy golf, you may tire of doing it every day for weeks on end.

Creating a list of retirement goals gives you something to look forward to, and may even motivate you to save more aggressively to reach your retirement goals faster. For example, if you imagine enjoying plenty of family vacations in retirement, you may need to establish a vacation fund.

You may instead envision spending your time volunteering or enjoying hobbies, be it woodworking, gardening, or painting. Regardless of how you choose to spend your time, make plans for it. If you don’t, other family members may be planning out your time for you. For example, you may become the default caretaker for your aging parents, especially if your other siblings are still working. Or you may become the “full time” babysitter for your grandchildren because your children assume you aren’t doing anything all day.

Pay Off Debt

The less debt you have when you enter retirement, the better. Review all current debts you face and compare interest rates and balances. This can help you decide which to pay off first. Once you’ve eliminated credit card and auto debt, see how you can aggressively pay off your mortgage. Not having a mortgage could significantly reduce your monthly expenses and make a considerable impact on how quickly you deplete your savings.

Along with tackling debt, take care of the big-ticket items now, rather than delaying them. These include replacing your home’s roof or other expensive repairs, updating old appliances, addressing your long-term care needs, and keeping your car in good working shape. It’s ideal to do this now while you still have a paycheck rather than when you’re retired and trying to live off of your savings.

Plan Out Your Expenses and Create a Budget

A common question pre-retirees ask is, “will my income sources cover my needs in retirement?” A budget is helpful throughout life but can be particularly beneficial during retirement when your income may be more limited.

Start by creating a budget that includes your essential expenses (housing, healthcare, and food) and your discretionary expenses (such as traveling, entertainment, and dining out). With this list, match essential expenses with guaranteed income, such as setting aside your Social Security benefits to pay for your healthcare. Then, look at your other savings and income to cover your discretionary expenses.

If your projected expenses don’t match your income and savings, you’ll either need to reconsider your expenses or increase your retirement income. These 10 years leading up to retirement can serve as a “trial run” to help instill a higher level of confidence that you can live off a certain level of income once you retire.

Hire a Financial Advisor

How much should you contribute to your 401(k)? What types of investments make the most sense for your circumstances and goals? Often, it’s not until we face a significant decision or make a mistake when we realize that we weren’t equipped with the proper knowledge. And then it may be too late to find help or rectify any missteps we make.

A financial advisor isn’t just there to hand you a financial plan and set you on your way. Think of an advisor as your lifelong financial partner. He or she can provide education, objective advice, and ongoing guidance as you encounter new challenges and opportunities.  This could mean adjusting your strategies, or simply reassuring you of your progress. With education and a reliable partner available to answer your questions, you can feel empowered to make informed decisions.

Next Steps

You don’t have to go at it alone and plan for your retirement on your own. At this point in your life, you should work with an advisor who can help you create a personalized retirement roadmap and work through various retirement scenarios, not just help your money grow. As an independent financial advisor, I want to help you address your retirement questions and feel confident about your future. I can work with you to establish a retirement strategy that integrates your goals and needs. Take the first step by reaching out to me for a complimentary consultation. Call my office at (949) 221-8105 x 2128, or email me at michael.loo@trilogyfs.com.