How to Plan for Retirement at Copeland Oaks

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Getting Your Finances Ready for Retirement

Just getting started with your retirement planning, or is retirement in your near future? Make sure you’re on the right track with your financing for when you plan on retiring. Ensuring that your nest egg will be sufficient for the lifestyle you want to have during your retirement years is a necessary step to take.

Planning for a financially secure retirement doesn’t have to be stressful. Assessing your retirement income sources, applicable taxes, and calculating a retirement budget can help you be well prepared for your retirement and prevent any unexpected bumps in the road.

Retirement Income Sources

It’s advised that you need to save about 70% of your pre-retirement income to live comfortably in retirement. What type(s) of income will be the main source for the funding of your retirement? Retirement income sources include pensions, IRA and 401(k), Social Security, personal savings, investments and other funds, and real estate or personal property value. While not all of these sources are taxed, understanding how some of the most common sources are taxed and the general guidelines to follow for each will help you budget more effectively for retirement. Use the total amount of income and deductions to estimate the tax rate and get a better picture of the true income you will have for retirement.

– Pensions

Contributed to by an employer during an individual’s working life, pension payment are fixed and determined by the length of the employee’s working years and annual income during these years. To determine whether your pension income is taxable, find out if the money went in pre-tax or after paying taxes. Commonly, pensions accounts were paid with pre-tax income so will be counted as taxable income on your income tax report. However, if the money went into your pension after paying taxes, then you won’t be required to pay again in retirement.

– IRA and 401(k)

For those who are 25 years away from retirement, a household income of $56,000 would need to save 15% of their income per year to have around $1 million saved in their retirement account by the time they retire. IRA and 401(k) are both considered types of retirement accounts and withdrawals made from these accounts are taxable. IRA, 401k plans, 403b plans, 457 plans, and other types of retirement accounts will be considered taxable income during retirement. The amount of tax you pay will depend on your total income and deductions, so planning ahead can help make sure you have the necessary funds. If done correctly, Roth IRA withdrawals are tax-free.

– Social Security Income

The amount of Social Security income a retired individual receives depends on a formula used to determine your average indexed monthly earnings. Then, the percentage replaced by Social Security depends on what income tax bracket you’re in. Depending on your combined retirement income, Social Security income may be taxable. If you will be receiving a high amount of monthly pension income, for example, then you may have to pay a high tax on your Social Security benefits. Up to 85% of Social Security benefits can be taxable income on your tax return. However, if you have no other or minimal other sources of retirement income in addition to Social Security, you may be able to receive this benefit tax-free.

– Investment Income

In addition to other income sources, an investment income can help you reach your financial goals for retirement. From capital gains to interest income, paying taxes on your different sources of investment income during retirement may be required. However, like with Social Security income, you may be able to qualify for the 0% capital gains tax rate if your other retirement income sources are minimal for the year. For bank CDs, once matured, only the interest is counted as taxable income. To reduce the taxes on your investment income, an accountant or financial consultant can work to advise you of best practices.

– Selling Your Home

Do you plan on selling your home and relocating during your retirement years? Selling your home can provide a substantial financial nest to use as income. If you’ve lived in your home for two or more years and are selling for less than $250,000 if you are single or $500,000 if you are married, your gains may not be taxed. However, the tax rules are different for properties recently bought or rented out.

Retirement Expenses

After calculating your estimated retirement income, determine what your expenses will be during retirement to come up with your budget. The total amount you will need for retirement and any adjustments that might need to be made are based on the amount you will be spending.

If you live in a home that is already paid off, then housing expenses are a lesser part of your financial planning than if you’re planning on moving to a retirement community or see the need for an assisted living facility in your future. In addition to housing expenses, make sure to take into account the aforementioned taxes on your combined income, all credit card debt and loans, health care and insurance, and overall living expenses. Calculating for any leisure expenses will also help you make the most out of your retirement years.

After calculating your total budget, does your combined income put you on track to retire when you were planning to? Working with a financial advisor to go over your income sources and total expenses can help you make sure you’re in a good place for retirement or help you determine how to get there!

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