Death, Taxes, and Retirement
By Gary Silverman, CFP®
In this space, we’ve been discussing what you need to consider when doing retirement planning. Lately we’ve been looking at problems determining your retirement cash flow—what you’ll get and what you’ll spend. Today I bring you death and taxes.
For most of us the very existence of taxes is a problem. And the reality is that many people have a tax time-bomb in their possession. When counting on an income stream don’t forget to either use after-tax numbers or have taxes as part of your budget expenses. Drawing $80,000 from your pensions and IRAs won’t satisfy your $70,000 lifestyle if you’ll owe $20,000 in taxes. So when you look at your account balances know that, depending on the tax structure of the account and/or the underlying investments, a sizeable portion of the total may really just be an I.O.U. to Uncle Sam.
Oh, and don’t be surprised if taxes go up. After all, the government has been under-taxing and/or over-spending for years. Eventually this catches up with an economy. It’s not so much they are passing the ball, it’s more like musical chairs. Will your generation be the one left standing with nowhere to go?
Then there’s death. In the Star Trek saga, Spock would often give the greeting of friendship, “Live Long and Prosper.” When last heard from on the series, he was 139 years old. His father, Sarek, lived 202 years. That’s a lot of living long and prospering.
Unfortunately, unless you are also at least one-half Vulcan, you probably won’t last as long. But you will likely live longer than you expect—dying is not the bigger problem in retirement planning—it’s living. With a married couple the average life expectancy for the longest-living spouse is in their early 90s…and what if they are above-average? They’ll make it into their late 90s about 25% of the time. Every one of those blessed years on earth costs money.
Do your retirement planning so that your money will last. And when you plan, make sure you use a reasonable life expectancy. After all, while running out of money won’t kill you, it won’t make you feel good either.
Imagine making this phone call to your child: “Your Mom and I weren’t anticipating living this long and didn’t make the preparations needed. We were hoping that you could help us, at least until we can figure something out.” As hard as that phone call might be for the kids to hear, it is devastating to be the one saying it.
In several studies the most common method for determining the amount of savings needed for retirement by consumers (that’s you) is guessing. That’s right; most people who ‘know’ they have enough to retire know this by instinct. No calculator need touch their fingers, they need not input information into an online retirement calculator, and there is certainly no need to talk with a financial planner. They just know.
Next time we’ll try to take some of the guess work out of it.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing