Tax Tips
Getting close to retirement

Q.I’m possibly a year away from retirement. My wife has already retired. I don’t know if I have enough money on hand to maintain my lifestyle, and I’m nervous and losing sleep. What do I have to do to assure myself that I can retire?

A The first and most important is to figure out how much you spend annually. You need to know how much your annual expenses will be, including taxes, to maintain your lifestyle. That, in itself, provides a dollar amount that your retirement will have to fund throughout the years of your retirement.

Therefore, you must establish what your fixed expenses are going to be such as housing, food, medical, transportation, insurance, etc. You should add to that any discretionary spending such as vacations and entertainment. You will also need to know how much your annual taxes will be once you do not have earned income. You will need to allow for inflation. Recap your expenses for the prior two years to find how much you spend annually.

Q.What if I cannot earn enough money from my retirement savings to support my life expectancy?

A That’s a great question. In today’s low-interest environment, it is impossible to just put money into a bank savings account and earn any kind of meaningful income. Depending on how much you have in your retirement account and its expected earnings, plus your expected Social Security income and any other income you may have, you may be short of funds when they are compared to your annual expenditures.

In that case you have to ask yourself some questions. Do I have enough in savings to draw from to maintain my lifestyle and will it last throughout my life expectancy? How much can I safely withdraw? You may have to seek out a professional such as a financial planner to help you.

Q.What can a financial planner tell me?

A He or she can help work out a plan to show you a way. Based on your financial needs as per the above, a financial planner can help determine when you should start collecting Social Security, how much you can safely withdraw from your savings, the rate of return your savings must earn to support your withdrawals, and even recommend someone who can advise you on investments you may need to make to create the income you will need.

You will also need to decide whether you’re OK drawing down your savings versus leaving inheritance for someone. Keep in mind your future money requirements will change as you age, and the funding now needed to maintain your lifestyle will change.

Q. I have heard that once I hit age 70 I have to take money out of my retirement plan. What’s the story on that?

A Yes, that is true. Once you achieve age 70-and-a-half, you will have to withdraw from your retirement plan a minimum amount based on your life expectancy. There are IRS tables that determine the percentage of withdrawals of the value from your retirement account. The withdrawals are called required minimum distributions (RMDs). You must make the withdrawals every year or pay huge penalties. Of course, you can take more than the RMD.

Q. I may inherit an IRA. Is that tax free?

A When you inherit an IRA, it is tax free at the time of the inheritance. However, when you take money out of the IRA, it will be taxable just like your own. The entire amount of the inherited IRA must be distributed within five years beginning after the year of death. If you inherited the IRA from your spouse, distributions must begin in the year when the spouse would have been 70-and-a-half. LL

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153. Visit our website at pbstax.com.

Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.