Reduce Debt Increase Wealth

Plan to Retire

July 04, 2021 MisterChuck Season 2 Episode 68
Reduce Debt Increase Wealth
Plan to Retire
Show Notes Transcript

Two questions to ask yourself, how long will my retirement savings last? How much will be lost to Income Taxes?

 Article Links:

https://www.westernsouthern.com/learn/financial-calculators/retirement-withdrawal-calculator

 https://www.investopedia.com/articles/personal-finance/062615/10-little-known-ways-reduce-your-401k-taxes.asp By TIM PARKER

HTTPS://WWW.KIPLINGER.COM/TAXES/TAX-BRACKETS/602222/WHAT-ARE-THE-INCOME-TAX-BRACKETS-FOR-2021-VS-2020 by: Rocky Mengle

Unknown:

Hello, I'm your host, Mr. Chuck. I'm a retired accountant turn truck driver, I have reduced my debt to zero in a short matter of time, debt reduction to achieve financial freedom. Last week, a friend of mine who knows me for a while knows I did income tax returns, called me and had some basic income tax questions, because he did something wrong on his return. And he was wondering if it should be amended or not. After he gave me a brief overview of what was going on, I told him, it really doesn't matter. Because in this particular case, all that income is taxed as ordinary income. And it won't affect anything, he just put it on the wrong line. I think if he gets a letter from the IRS should be easily to explain to him that that income was reported and just tell them how it was reported. And he should be good. And then conversation, he mentioned to me that his retirement income that he has saved up his life. And he knows that you don't have to start taking the minimum distribution until age 72, which which is recently changed, in 2019. But he decided to start taking it out early to spread out his distributions. So he could try the pay less income taxes on it. Which that brings me up to this episode, plan to retire. There's two questions to ask yourself. Number one, how long are my retirement savings last? And number two, how much will be lost to income taxes? Well, that is not a defined thing that you can figure out. But the closer to retirement you are, the more likely you able to get a better picture on those two questions. Everybody is worried that they didn't start saving for retirement soon enough. And they don't have enough money to live their lifestyle, the way they would like to when they retire. But as I've been preaching, or saying for quite some time, now, the less debt you have, the better off you're gonna be. Because if you don't have to pay off debt, once you reach your retirement age, and you plan to retire, whether you're retiring at a younger age, or at an older age, it doesn't matter. If you have zero debt, your retirement savings will last a lot longer. And you could probably most likely get by with less retirement savings. That but if you retire early, don't bank on that. Because they're earlier retire, the longer you got to be retired, the more money you're gonna have to have to sustain your lifestyle. So my two questions are, how long are is my retirement gonna last? And I found a retirement calculator from and this is in my show notes, you can find a link to it. western and southern Financial Group retirement withdrawal calculator, I find this is a good thing to know, to figure out how long the current amount you have, or the amount your thank you might have when you retire. How long will that last. And it also factors in your so security and or any other pensions. So you start out and you put in your monthly required income that you need to pay your bills. So I count for inflation. So I put in more than what I'm currently spending. Then this second step is you put in how much your Social Security benefits for b. Now if you don't know what that's gonna be, you can go to my Social Security comm I believe is the website, my Social Security go there. If you don't have an account, he create your account, you log in, and they give you projections of how much your Social Security benefits is gonna be. So you can put that number in. You could put in my case, I have state and local government pension income. So I put in that number because I've been drawn on it since I turned 60 and that was six years ago. So I put that number in and it takes the amount that you want or need to live on, I did put in the amount I want. And that takes your social security that takes your other pensions or any other income. If you have some passive rental activities, such as real estate rentals, and you have a positive cash flow, he could probably put that positive cash flow in there. And then you put in how much of your retirement savings you have, from all your accounts, and oh project, how long your retirement savings will last, based on how much your so security and any other income, you may have less the amount of money that you want to live on every month. And then it takes out the difference between those two. So if you want $5,000 a month to pay your bills, and you have 20 $500 in Social Security, for example, and you have $1,000 and other income, that's 3500. So that gives you 1500, you come up short. So it takes 15 $100 a month out of your retirement income. And that tells you how many years that you're in, that will last and you put in your rate of return at justice for inflation, you can put an inflation rate in, you can put a rate of return and it will calculate how long your retirement savings will last. If you take out very little, it could last 30 years or more it could even grow. If you have to take out a lot, it'll become up short. And I'll tell you how many years you have. So if you do that, and you come up short, now you can take steps to maybe reduce your spending, retired later, got to work to at least your full retirement age for Social Security, maybe work past that a couple years. And that will allow you pay off some debt and get all your debt taken care of, and reduce your spending. And you can stretch out what you can increase what you have. And you can stretch out what you're spending, reduce your spending. So you're what you have will last a lot longer. If you start planning for these before you retire, you're gonna be a whole lot better off, I recommend western and southern Financial Group retirement withdraw calculator, you can Google it, I have a link in my show notes. And it also has articles down below. How long will it last, it's based on your life expectancy. As well how long you think you're gonna live based on Social Security. If you go to my Social Security, it will you can look up your age. And I'll give you an guesstimate of what they think you're gonna live. And my case for the year I was born. I'm supposed to live until I'm 84. I could live a lot longer. My father died like younger, my mother lived a lot longer. It's hard to say pends on your health, your current health, family related issues like dementia or heart trouble and things like that. So it gives you as you go through each step a bunch of articles, and reduce your retirement incomes by spending less, you know, increased work part time, whatever you want to do, but you can plan ahead. And when you retire, it's too late. You should be looking at this 10 years before you retire while you're still working. That way you can get your life more under control. Maybe you can increase your retirement savings. Maybe you can decrease your spending. And maybe you can do both. There are ways when you do need to take money out of a 401k I have another article 10 ways to reduce your 401k taxes. The best way to do that is you have to know what tax bracket You're in for your situation. I have a article link to an article as kiplyn Sure. What are the tax brackets for 2020 and 2021. You can scroll down and see what they are the simplest way to figure out what taxes are going to eat up your retirement income as it comes in is to look at your current income tax return the taxable income amount, which would be on page two of a 1040. That's after your itemized deduction, that's after all, your business expense as after contributions to your IRA or whatever you have going on. And these are 10 ways you can reduce your 401k taxes, and this is money that's coming out of a 401 K, one, you can take out less every year, he can start taking it out before age 72 and a half. So you take it out over a longer period of time, stretch it out. So you can keep in a lower, the less you take every year, you can take it out of a tax free account, and put it in a taxable account and then build it up there, you're gonna end up paying more taxes. Now, if you're in your 40s, and you have $500,000, a million dollars o more in a 401k, you need t consider to put money into Roth 401 K. And you got to d that when you're young. Becaus when you set up a Roth, you hav to have it open for four years And the advantage of that i you're paying the income tax i the current year on the mone you're putting in, then all th money that you earn in tha account is gonna be tax free and it's gonna come out ta free. So all your capital gains you're not going to pay tax o all your dividend income tha you reinvest, you're not goin to pay tax on. So it's a goo thing to do. And that way, whe you retire, you don't have $ million in a 401k. And you hit had to take out a minimu distribution, and I have to tak out 150,000 every year, an that's gonna bump me way up int a tax bracket, I got to pay whole lot more taxes. That i the benefit of having a Rot 401k. Now another way to get th money out of there is to take loan instead of a distribution. I'm not so sure about that. And as the still the working exemption where you can delay taking money after age 72. If you're still working full time, maybe you no longer work at the job were that 401 k was, but you're still working full time, for whatever reason. Maybe you're a consultant or something like that, you may be able to delay it. But then beware this article ends encyclopedia.com 10 little known ways to reduce your 401k taxes. It was I have a link in there and you need to go through and read this. Consider harvesting tax losses, his sellers selling underperforming securities in your regular account. So you have a regular investment account and you have some losses there he sell off some your losses. And then that'll help reduce some of your income to avoid the mandatory 20% withholding. If you take money out of there, you gotta is required to do a 20% withholding for federal income taxes. If you're already retired from that place, you left your 401k at that employer, you should transfer your 401k into a traditional IRA. When you leave that employer that way you have control and you may have more options on what to invest in. But also, if you transfer roll that over into a traditional IRA, when you leave that employer, when you take it out of the IRA, there's no mandatory withholdings. So you can take out little by little, and you can pay taxes once a year when you file your return. Or you can make estimate taxes but you don't have to have withholdings when you take it out of the IRA, that's a good thing to know. And a retirement planner or a financial planner should be aware of this type of stuff and help you minimize your taxes when you're taking an out 401k. And then again, watch your tax bracket. If you're going to quit working or retire from working, your incomes gonna go down so your wage income could be way down. But if your wife is still working because she's like 20 years younger than you are and she has a decent job, then you got to be mindful of your tax bracket. Maybe your tax bracket will drop but how much will drop? Do you want to pay 22% or more on income taxes, federal income taxes on your retirement? I sure don't. So you want to look at that and Look at how things is going to change in your life and how that's going to affect your income tax return. If you pay off your mortgage, and you don't have any interest deduction, that definitely gonna affect your standard versus itemized deductions, or maybe how the tax rate tax laws could change, that could affect it. Now, that is something you may not be able to plan for, he can have an idea. So if you get up to 329,000, and this is 2021 rates, if you're over is this say this, if you're over 172,000 of taxable income, you're going to be in a 24% rate, if you can keep it under 81,000, you're being in a 12% rate. So that's a what 12% of income taxes you're going to save. And you're probably gonna save some at the state level too, if you live in a state that has a state income tax, that's married filing joint, so you need to know the brackets and just apply the brackets to your most current year. So look at your most current tax return that you just did. It should be 2021 by now, figure out what the highest bracket that you're in based on your taxable income. And if you take out x L, your retirement, how much tax or a Will you have to pay? Now you might want to look at it, okay, I retire at the end of the year in December, and I'll start taking money out in January, well, if you're below age 72, or if you're working full time, that will help you. Because now you can take that wage income and take it out of your taxes, lower your taxable income down, see what bracket you're in, and then how much you need from your retirement account, to pay your bills and live on and to do what you want to do. And you can control. You know, the next year you can control. Okay, if I take out 50,000 versus 60,000, I can say 15% on my taxes. That's just a random example. I don't know if that's true or not. But you can look like that you can do some scenarios, maybe your tax plan or your tax preparer may be able to help you with that during the off tax season. He can do it yourself. You just need to know what bracket you're in. And if you take out your taxable income, just look at your taxable income, subtract out your wages, and then look at that taxable income, what bracket Are you in? How much? Can you withdraw before you're bumped up to the next bracket, which it goes like from 10% to 12%? To 22%. So it's the 12 the 22% range we need, because that's a 10% increase in taxes. So that is a significant amount. You need to look, can I keep it under that? So I can avoid paying more income taxes? Or no, I really have to go over it. And if I go over it, what's the next bump up where it's gonna cost me more and income taxes. And that's the thinking you should be doing when you're doing these type of things. So that's about all I have on that subject. And I'll be right back in one moment to talk about things younger people should be doing for the retirement. If you listen to this podcast using an apple podcast app, please rate and review this podcast. If you don't know how to rate and review within the apple podcast app, do a search even if you're already at reduced that increased wealth. You do a search when the search is done, you click on reduce that increase wealth Eden scroll down through the episodes and towards the bottom. You'll see write a review. You can rate the stars by if you click on write a review, you can write your comments and then click on the number of stars you wish to select. Maybe you're much younger, maybe you're 25, the 45 years a and you're thinking I listened to this guy talk. He's talking about older people looking at the retirement and deciding whether or not they have enough money to maintain their lifestyle. And he's talking about paying income tax on that retirement income. And that's a long ways off and I'm all not worried about it. But you should be because even if you're 20 Five to 45 range. Everything you do at this age is gonna affect how much money you have for your retirement. If you buy a too much house more house than what you can afford, if you buy that expensive car, instead of a lesser, expensive car, because you're trying to keep up with the Joneses, all these things affect your ability to say money, the more credit card debt you have, that's going to affect your ability to save money, whether or not you're going to be putting it into a retirement account, or any type of savings account, or any type of investments, the more debt you get into, the more of your money is used to service that debt, the less discretionary income you're gonna have, the less you can save, the less things you can do that you really want to do. So by keeping your spending under control throughout your life, even if you have a 401k set up for work, even if you're maximizing your contributions, even if you're maximize your employer's matching, he got to keep your spending under control. If you don't, when you get to be 55 or 60. And you're thinking about retiring, do you want to work an extra five or six years, if you would cut your spending out today, when you're 30 years old, or 40 years old, and you can keep things under control, you can build up more new retirement plan. So when you hit 58 6060, to whatever age you want to retire, you have significant amount of money satisfy and our retirement account and or non retirement account. Because if you're under a certain age 59 and a half, you'll be penalized if you take money out a retirement account. So knowing tax law, knowing what you're spending, knowing what your budget is, knowing what your needs are, knowing what you're gonna do when you get to retirement, you just want to sit at home all day and watch TV and do nothing? Or do you want to travel or you want to go out and enjoy yourself? Do you want to go out and have a good dinner once a week? Or do you only want to go out and have a great dinner with your friends, once a quarter. That's the difference it could make. Because the earlier you start saving, no matter how much the amount, the more you're gonna have the when you get closer to retirement. And again, if you have a 401k once you get 500,000 maybe more on this saying that's a good number to start looking at 500,000 750,000 you may want to consider setting up a Roth 401 K. Because the money goes in you pay taxes on it earns everything it earns while it's in there is tax free when it comes out as tax free. So that when you get to the point when you start taking money out, and you are in a higher tax bracket, you can split up part of it can come out of the taxable account. And part of it can come out the tax free account. So you still have the amount of money you want on a regular basis. And you can minimize the amount of income tax you pay on that money. It's a simple plan. Failing to plan is planning to fail. That's how it goes. And it's no more true. And this than anything else. You can think up there earlier you get started and saving for your retirement. The sooner you realize wasteful spending, whether it's a house you can't afford automobiles you can afford buying a luxury boat, keep it under control. I'm not saying don't enjoy life. I'm saying don't go overboard on your spending, especially the younger you are the more control you have them More, the less that you have. Overall, throughout your lifetime, the better off you're gonna be. quit working for the bank and the credit card companies work for yourself. I'll be back in one moment was my final thoughts, perhaps you are already out of debt, and you listen to the podcast, you think I got good information. If you want to refer people, I appreciate it. If you can steer people towards listening to this that you know are having financial problems, maybe we can help them achieve their goals for the things they want to do. My final thoughts. You're never too young to start saving for your retirement. You're never too young to start saving, period. If you're working a full time job, and you have yourself a career, you need to start saving for retirement, no ands ifs or buts. You got to keep your spending under control throughout your lifetime. So that you have enough money to enjoy life. When you get to retirement age, you're thinking you're not gonna live that long, maybe you're thinking so security won't be around. So security or some other government form of retirement will be there to help assist you and your monthly income. I don't know what it could be or what it will be. But there'll be something that you cannot rely on the government to take care of you. You got to take care of yourself. And by saving for your retirement and keeping your spending under control throughout your life will help you achieve these. It will help you accumulate enough income or enough savings or money that you can pass on to the next generation to help your children or grandchildren throughout third life and that will make you feel much better. Or if you just want to have enough to travel around the world and enjoy your retirement. You don't want to be sitting at home being bored doing nothing because you don't have any money to do anything else.