From Retirement Now Newsletter April 8th 2021

As you are probably well aware of, the tax filing deadline has been extended to May 17th this year. This gives the IRS more time to implement tax code changes from the recent COVID-19 relief package, also known as the American Rescue Plan.

And it also gives you the taxpayer extra time to file your taxes as well as make contributions to IRA’s for the prior year 2020. I found a good checklist of things to do in the decade before you retire. And 3 of the points are very pertinent during this tax time of year.

First is the importance of knowing your retirement savings target number. I would recommend against going off of rules of thumb, like accumulating 12 times your annual salary, or having savings that support 80% of your preretirement income annually.

Instead take a look at your spending each month, then calculate how much retirement income you’ll get from Social Security and any pensions. Then focus on filling in the gap that remains. This is a much more accurate way.

And knowing this savings number also involves being aware of taxes, since you can only spend after-tax income. Where your savings are located is important to keep in mind. If they are mostly in pre-tax 401k accounts, then every withdrawal you make in retirement will be subject to taxation. When looking to hit a savings target keep this in mind. A $500,000 401k may only have $400,000 in after-tax money for you, assuming roughly 25% is taken away through taxes.

Second, if you have the wherewithal put away additional savings during your decade before retirement. Concerning tax-advantaged accounts, if you’re 50 or older you can put $7,000 per year into an IRA or a Roth IRA (only $6,000 for younger than 50). And you can put up to $26,000 in a 401k (versus $19,500 under age 50).

Saving more has a double positive impact on your retirement planning. It lets you accumulate more. Also the act of saving more means you are spending less. And lowering your expenses makes it cost less to afford retirement.

Third, in the decade before retirement be thinking about future taxes. There have been tax cuts lately from Congress during the last 4 years. There have been stimulus checks. And there have been large deficits that have increased the federal on-budget debt.

No one knows how long this can go on. But at some point it seems probable that tax rates will have to go up. So you need to consider this now while you have time to take action.

One way to help protect you from possible rising future tax rates is to use Roth IRA’s or Roth 401ks. These are funded with after-tax dollars, but the growth inside them is tax free. You can also convert an IRA to a Roth by paying the tax on it. Then later in your retirement withdrawals from the Roth accounts will not be subject to taxes, even if Congress has raised rates up.

Conclusion: The decade before retirement is an important time to take action and prepare for the future. If you need help with these issues, click here to see how we could possibly serve you and how you can book a phone chat with me.


Chris Hammond