Puzzle Piece #3

Retirement Puzzle Piece #3

Taxes in Retirement and Beyond

Learning Video: Taxes in Retirement and Beyond Part 1

Regarding taxes in retirement and beyond, first, some points to ponder:

  1. During the past 100 years the top U.S. marginal tax rate has ranged from below 10% to more than 90%. Today, in 2015, the top tax rate for most Americans is 35%.
  2. The Federal Budget Deficit for fiscal year 2014 was $680 billion which has been added to the National Debt which, as of January 2015, stands at over $18 trillion.
  3. 78 million baby boomers are now reaching retirement age and thereby placing an ever increasing burden on the Federal Entitlement Programs of Medicaid, Social Security and Medicare.
Do You think taxes will be going up or down? Well, don’t form your opinion just yet. Keep reading.

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Aspects of America’s Finances

Let’s first talk about the Federal Government’s Annual Fiscal Deficit. Remember, a deficit means expenses exceed revenues and remember each annual deficit is added to the National Debt which I’ll get to next.

And so the 2014 Federal Fiscal Deficit ending 9/30/14 was $680 billion.

So, to grasp how big federal deficits are, let’s try to understand the enormity of the word Trillion

What is a Trillion? One Billion is a thousand million. One Trillion is a thousand billion.

Try this analogy: One Million seconds equals 12 days; One Trillion seconds is more than 30,000 years! OR

One Million dollars is a stack of $1,000 bills four inches high.

One Trillion dollars is a stack of $1,000 bills 67 miles high!

Next Item regarding the State of America’s Finances: The National Debt, which, as of January 1st 2015, is a staggering $18 Trillion.

As the U.S. government has spent an unprecedented amount of money to fix the economy, there has been an equally great need to raise the cash to pay for it. One way this is accomplished, other than from taxes or printing dollars, is through borrowing.

Borrowing is the process whereby Uncle Sam sells Treasuries of varying maturity’s and interest rates. The Federal government has been partially funding its operations via the sale of Treasuries for decades. And, this borrowing adds to the national debt.

When it comes to our National Debt, many so-called experts and politicians believe we have no real debt ceiling. Their reasoning: We are the U.S. and we would never need to declare bankruptcy because our dollar is the world’s reserve currency and we have the ability borrow at great rates and to print dollars endlessly.

Many Americans have no idea that the U.S. dollar is just one of many reserve currencies that have existed throughout global history. Guess what happened to the reserve currencies that came before the U.S. dollar like the British Pound Sterling. You’d be correct if you guessed that they lost their world standing due to abuse and reckless currency manipulation. Just like what we are experiencing within the Federal Government today.

The point is, an appropriate long-term fix to our country’s debt crisis does not yet exist. Washington argues over $10–$30 billion budget cuts while we are racking up multi-billion dollar annual deficits.

Final Aspect of America’s Finances

Current Federal Unfunded Liabilities: (that is: Entitlement Programs where the Federal Government has an obligation to pay and no idea where the money will come from):

Medicare Unfunded Liabilities:                 $27.5 Trillion

Social Security Unfunded Liabilities:         $13.5 Trillion

Other Federal Unfunded Liabilities:          $51.5 Trillion

Total Federal Unfunded Liabilities:    $92.5 Trillion

And think about 78 million baby boomers now reaching retirement age and qualifying for these government entitlement programs. Starting in January of 2011, 10,000 baby boomers/day began to turn age 65 and that will continue for the next 20 years!

Where is all the money going to come from to support these programs? Well, unfortunately one primary answer: Taxes.

Taxes in our Future

Years ago many financial professionals advised clients that their average tax rates will go down in the future, specifically during retirement. Now, however, almost every economic expert agrees that tax rates will most likely be higher – perhaps significantly – one decade from now.

Big Mistake for People in or near Retirement:

Not understanding all the tax rates and rules that affect your investments and especially your qualified retirement plans such as IRAs, 401(k)s & Pensions. This is an area of retirement that has huge potential for error.

To ignore or mishandle tax issues in retirement such as:

  • Not understanding the Progressive Tax Rate System
  • Not knowing what is your “Effective Tax Rate”
  • Not knowing what constitutes “Earned Income”
  • Not knowing what constitutes “Investment Income”
  • Not knowing what tax rules apply to each

Too much not knowing or acting incorrectly, can severely impact your nest egg and end up making the IRS your #1 Beneficiary. Remember: All taxes saved are additional dollars earned.

Your Personal Tax Plan

Always be pro-active in your tax planning with the following suggestions:

  • Review your Tax Return every year. Look for tax saving opportunities
  • Efficiently Tax Plan for 2015 and beyond.
  • Take advantage of Tax-Free and Tax-Deferred Growth Vehicles
  • Minimize Reported Income and thereby possibly minimize or eliminate tax on Social Security Income
  • Learn how to Generate Tax Free and/or Tax Favored Income
  • Consider a Roth Conversion… something I’ll recap in the next learning video
  • Look for warning signs that your qualified retirement plans such as your 401(k) or IRA may be broken.

For more information regarding taxes in retirement and beyond, you can order a couple of my Special Reports “10 signs your qualified retirement plan is broken” or “What they never told you about your 401(k).”

How to Assemble the Retirement Puzzle for Financial Peace of Mind