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Tax and Legal Checklist For Those Nearing
Retirement
You have worked hard all of your life and can now think about retiring and
taking it easy. Congratulations. Now comes the task of preparing for your retirement.
There are many details to cover, both financial and non-financial, including
income, taxes, maintenance of current lifestyle, health care, asset transfer,
home ownership, travel and extra expenses. Listed below are some
important points to consider when planning for your retirement:
- Income Needs It is important to first determine
how much income will be needed to pay your monthly household expenses, including
your mortgage, utilities, health insurance and so forth.
- Income From Social Security Most
everyone may have received a social security statement within the last few
years, detailing
how much of your lifetime income has been recorded and contributed to your
social security benefits at retirement age. If not, go to your social security
office and make an appointment with them. Social security is certainly
not enough income to pay for most retirees pre-retirement lifestyles. In
fact,
the average monthly benefit in 2001 is only $845, and the highest possible
benefit payable to a 65-year old retiree is $1,536 per month.
- Income From Pension Plans, 401(k),
IRA There are many types of retirement and
pension programs, which many companies participate with their employees.
Others may
have established their own IRAs, Keogh plans, SEPs and SIMPLE
IRAs. Withdrawals from these plans prior to age 59-1/2 are usually
penalized, and certain minimum distributions must be taken once age 70-1/2
is reached. Knowing how much is available for withdrawal, presuming that
you
are older than 59-1/2, is important in budgeting your monthly living costs.
- Personal Savings Decide how much, if any,
personal savings will be converted into retirement income. To turn equity
investments into retirement income,
retirees
may
decide to sell off part of their holdings and put the lump sum after taxes
into income-producing
bonds, CDs or annuities. Or, they may work out a plan to tap a percentage
of those holdings each year. Unfortunately, it is difficult to predict
what the rate of return, or earnings will be from year to year. Therefore,
it is
difficult to predict the income to be received.
Some retirees
may have trouble determining which investments to sell and which to keep.
There is somewhat of a tax break, however, when profitable investments
are sold.
Capital gains are taxed at a lower rate than ordinary income. To qualify
for this rate, investments must have been owned for at least one year.
There are
bigger tax savings for investments purchased in 2001 or later if they are
held for at least five years before selling. In those cases, the tax on
capital
gains will be lowered to 18% for those in the 27.5% tax bracket, and 8%
for those in the 15% tax bracket.
- Home Equity Consider the sale of the
residence or a home-equity conversion. Equity in a residence can be a significant
source of funds for the client
who
has more than one residence or who wants to downsize to a smaller home. Taxpayers
who sell or exchange a principal residence can exclude up to $500,000 (married
filing jointly) of realized gain from such a sale.
- Part Time Work Consider whether part-time
work will be an additional source of retirement income. Although most retirees
never completely
retire, there may be social security consequences with regard to the amount
of
income one
may earn. If you are between the ages of 62 and 64, you will be penalized
$1 in social security benefits for every $2 earned in excess of $10,680
of
earnings
in 2001.
There are no earnings limits after attaining age 65 or older.
- Life insurance Some retirees have dependents and need
to keep up an adequate amount of life insurance. Life insurance proceeds
may be
needed to supplement lost pension income to a widow or widower upon losing
their
spouse’s
retirement income. However, others may be over-insured, due to having
a mortgage-free home and other income resources that may make having so
much
life insurance
not necessary. For those people, tapping into their life insurance cash
values to pay other expenses may make sense.
- Estate Plan Estate planning is the preparation of
an individual’s instructions about the disposition of assets upon death.
It could be as simple as the preparation of a will, or as difficult as
establishing a family limited partnership. For 2002, if your estate is valued
in excess
of $1,000,000, your heirs may owe estate taxes of 55% of the excess amount.
Depending on the circumstances and the value of your estate, the best advice
one can give to someone who is contemplating retirement is to talk to an
estate tax attorney or financial advisor who is qualified in financial estate
planning.
They can guide you in developing an estate plan to ease the burden to your
loved ones after you are gone.
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