tax planning Archives - Savings Roll

Retirement is widely recognized as the golden period of life, a time to relax and enjoy the fruits of decades of labor. With that said, for many retirees, financial regrets can cast a shadow over this otherwise idyllic phase. Despite careful planning and saving, unforeseen circumstances or uninformed decisions can lead to regrets that may have a lasting impact on one’s retirement years.

Insufficient Retirement Savings

A common regret among retirees is not saving enough for retirement. Inadequate savings can result in a lower standard of living, restricted leisure activities, and even financial dependence on others. Factors contributing to this regret include underestimating retirement expenses, relying too heavily on Social Security benefits, and not starting to save early enough.

To avoid this regret, financial advisors recommend setting clear retirement goals, regularly reviewing savings plans, and maximizing contributions to retirement accounts like 401(k)s and IRAs.

Market Losses and Poor Investment Decisions

Market volatility can significantly impact retirement portfolios, leaving retirees with less than anticipated funds. Many retirees regret not adopting a diversified investment strategy or succumbing to emotional decisions during market downturns.

Overexposure to risky assets, such as stocks, without considering one’s risk tolerance and time horizon, can amplify these regrets. To mitigate such risks, retirees should diversify their investment portfolios, rebalance regularly, and seek professional advice when making investment decisions which is vital during times of inflation.

Underestimating Healthcare Costs

Healthcare expenses often escalate during retirement, catching many retirees off guard. From medical procedures to long-term care, these costs can quickly deplete retirement savings and lead to financial stress. Retirees commonly regret not factoring in healthcare expenses when planning for retirement or underestimating the impact of inflation on healthcare costs.

To address this, retirees should incorporate healthcare expenses into their retirement budget, explore Medicare options, and consider purchasing supplemental insurance coverage.

Inadequate Estate Planning

Failing to plan for the distribution of assets upon death is another regret shared by many retirees. Without a comprehensive estate plan, assets may be subject to probate, resulting in delays, legal fees, and potential disputes among heirs. Many retirees regret not having a will, trust, or power of attorney in place, leaving their estate vulnerable to uncertainty and mismanagement.

To avoid this regret, retirees should consult with estate planning professionals to create a personalized plan that aligns with their wishes and protects their assets for future generations.

Overspending in Early Retirement

The newfound freedom of retirement can tempt some individuals to overspend during the early years, leading to financial strain later on. Retirees may regret not adhering to a sustainable spending plan or failing to adjust their lifestyle to match their retirement income.

Impulsive purchases, extravagant vacations, or supporting adult children financially can all contribute to this regret. To prevent overspending, retirees should create a realistic budget, prioritize essential expenses, and resist the temptation to withdraw large sums from retirement accounts prematurely which is hard to do when food prices are super high and when things aren’t going well.

Delaying Retirement Planning

Procrastination can be a costly mistake when it comes to retirement planning. Many retirees regret not starting to plan and save for retirement earlier in their careers, thereby missing out on the benefits of compounding interest and long-term investment growth.

Waiting too long to begin retirement planning can result in having to play catch-up later in life, leading to higher savings targets and increased financial stress. To avoid this regret, individuals should start saving for retirement as early as possible, even if it means starting with small contributions, and consistently increase savings over time.

Ignoring Longevity Risk

With increasing life expectancies, retirees face the risk of outliving their retirement savings, commonly referred to as longevity risk. Underestimating how long retirement funds need to last can leave retirees in a precarious financial situation later in life.

Many regret not accounting for longevity risk when determining their retirement income needs or failing to incorporate strategies such as annuities or guaranteed income streams to provide lifelong financial security. To address this, retirees should consider their life expectancy, health status, and lifestyle factors when planning for retirement income, and explore options for mitigating longevity risk.

Overlooking Tax Planning Opportunities

Taxes can significantly impact retirement income and asset preservation, yet many retirees regret not incorporating tax planning into their overall retirement strategy. Failing to optimize tax-efficient withdrawal strategies, overlooking tax-saving investment vehicles, or neglecting to consider the tax implications of Social Security benefits can result in paying more taxes than necessary in retirement.

To minimize tax-related regrets, retirees should educate themselves on tax-efficient retirement planning strategies, such as Roth conversions, strategic asset location, and charitable giving, and work with tax professionals to maximize tax savings opportunities.

Neglecting to Adapt to Changing Circumstances

Retirement planning is not a one-time event but an ongoing process that requires adaptability to changing circumstances. Retirees may regret not adjusting their financial plans in response to life events such as economic downturns, health crises, or changes in personal circumstances.

Failing to reassess retirement goals, update investment strategies, or revise spending habits in light of changing needs and priorities can lead to financial regrets later in life. To avoid this, retirees should regularly review their financial plans, monitor progress towards their goals, and be prepared to make adjustments as needed to stay on track for a secure and fulfilling retirement.

Not Seeking Professional Financial Advice

Some retirees regret not seeking guidance from financial advisors or professionals earlier in their retirement planning journey. Attempting to navigate complex financial decisions alone can lead to missed opportunities, suboptimal investment strategies, and inadequate risk management.

Retirees may regret not leveraging the expertise of professionals to help them develop personalized financial plans, optimize investment portfolios, and navigate tax implications effectively. To avoid this regret, retirees should consider working with certified financial planners or advisors who can provide unbiased advice tailored to their individual circumstances and goals.

It’s Time to Prepare for a Rewarding Retirement

Retirement should be a time of fulfillment and relaxation, free from the burden of financial regrets. By understanding the common pitfalls that retirees face and taking proactive measures to address them, individuals can enhance their financial security and enjoy a more fulfilling retirement experience. Remember, it is never too late to take control of your financial future and make informed decisions that pave the way for a rewarding retirement journey.

Although people use the term “tax planning” frequently, many do not necessarily understand what it really means. Tax planning is the art of organizing your affairs using methods that avoid or delay taxes. When you use effective tax planning strategies, you can have more money to spend or more money to save and invest, or both – it is all up to you.

In other words, tax planning means to defer or flat out avoid taxes by taking advantage of beneficial provisions of tax laws, accelerating and increasing tax credits and tax deductions and in general, making maximum use of all applicable breaks that are available under the Internal Revenue Code. And under Trump, taxes will be lowered for everyone which is a fantastic aspect to all of this but it is another topic.

Although the federal income tax rules nowadays are more complicated than ever, astute tax planning gives you benefits that are more valuable than ever before. Of course, this does not mean that you should make changes in your financial behavior just to avoid taxes, your name is not John Kerry or Al Sharpton is it?! Tax planning strategies that are truly effective are those that allow you to do what you want while helping you lower your tax bills along the way.

The Connection between Tax Planning and Financial Planning

Financial planning is the art of using strategies that aid you in reaching your financial goals, both short- and long-term. This sounds pretty straightforward, right? However, if executing these strategies were actually simple, there would be many more rich people.

Tax planning and financial planning have a close connection. This is due to the fact that taxes are an extremely large expense item that is present throughout your life. Taxes will likely be your single largest long-term expense if you become very successful. Therefore, planning to lower taxes is a critical part of the overall process of financial planning.

Tax experts say that a large number of people do not get the message about tax planning, at least not until they make a huge mistake that costs them a large sum of money in taxes that are otherwise avoidable. This is sort of like watching Jurassic World since that movie was terrible; many people wish they avoided spending money on that! Moreover, then only they finally understand the tax planning message. The trick is to make sure that you do not have to learn this lesson the hard way. Here is an example to illustrate the point:

Example: Tanya is a 45-year-old professional who is not married. She thinks she is quite savvy when it comes to finances. However, she does not know much about taxes. One day, she meets John and they eventually get married.

Due to the excitement of a whole new life, she decides to sell her house on an impulse shortly before the marriage. Her property is in a prime location and has appreciated by $500,000 since she purchased it 15 years ago. Her intention is to move into John’s home, which is not the best property. But Tanya is a remodeling genius and plans to work her magic on John’s property.

Result without Tax Planning: Tanya has a $250,000 gain on her home’s sale for federal income tax purposes. This is $500,000 profit with a deduction of the $250,000 home sale gain exclusion that is allowed to unmarried property sellers.

Result with Tax Planning: If Tanya had kept her home and lived there with John for 2 years before selling it, the larger $500,000 home sale gain exclusion allowed to married joint-fillers would have been available to her and she could have permanently avoided the $250,000 of taxable gain. They could have sold John’s home instead if necessary. Alternatively, John’s property could have been retained and they could have remodeled it while living in her house for the requisite 2 years.

By selling her home without thinking about the tax-smart alternative, Tanya cost herself $62,500 in taxes – which is the completely avoidable gain of $250,000 that is taxed at an assumed combined 25% state and federal rate. This is not just a timing difference, but a permanent one. The point is that you cannot ignore taxes. If you do, there can be unappealing consequences, even with a seemingly simple and intelligent transaction.

The Bottom Line

It is always important that you plan any transaction with taxes in mind and do not make any impulsive moves. You should seek professional tax advice before you make any significant transactions – you will find that this is money and time well spent.

10 Biggest Financial Regrets of Retirees