Show #266 Airing Sunday, August 8, 2004
Question: For many retirees, Social Security is the largest portion of their income. So many are trying to make it stretch as far as possible, right?
Answer: A recent survey found that workers expected Social Security would provide just 13 percent of their financial needs. Retirees answering the survey said that Social Security provided nearly half of their monthly retirement income.
What’s more, retirees are paying more income taxes than ever before, and make common mistakes that can shrink their Social Security income.
Question: And you’ve made a list of some of those mistakes. First is failing to take full advantage of deductions.
Answer: Complicated IRS rules make it easy to miss out on common deductions. Several categories have minimum thresholds; for example, you can only deduct medical and dental expenses that exceed 7.5 percent of adjusted gross income.
You can bunch expenses so that you exceed the thresholds one year but not the next. For example, you may want to time the purchase of medical equipment in the same tax year.
Don’t forget the mortgage deduction. If you’re currently paying any interest that is not deductible (auto loans/credit cards), or anticipate a large expense, consider a home equity loan. You may be able to pay less total interest while increasing the amount of deductible interest you pay.
Question: The second mistake is triggering taxation of Social Security benefits. Can you explain?
Answer: Many assume their Social Security benefits won’t be taxed, but today as much as 85% of it may be if you take too much annual income. The following are considered when determining taxation:
- Social Security benefits (50%)
- Wages, salaries, bonuses
- Alimony or Maintenance
- Annuity Withdrawals (part recognized as withdrawn earnings) and capital gains
- Certain IRA distributions and pension distributions.
- Rental Income, etc.
You can potentially reduce your taxable income using deferred annuities, which are NOT considered.
Question: Another mistake is taking too much taxable income.
Answer: Not all income is treated the same. You may find that more of your income is subject to taxation at a higher rate than you’d like. Options to change this include:
1.) Municipal bonds: Interest and dividends received from municipal bonds in your state are generally free from federal and state income taxes.
2.) Deferred annuities: Assets in these can grow tax deferred. Once you begin withdrawals, they are first allocated to earnings and then to return of your principal (a tax free portion).
Question: Next is taking retirement plan distributions too slowly or too late.
Answer: At age 70 ½, you are required to begin taking distributions from your IRA, and you cannot take these too slowly. They penalty for withdrawing too little can be severe, with penalties and income taxes adding up to as much as 75 percent on the amount that is not distributed as required.
By naming a child as your beneficiary, you might greatly increase the joint-life expectancy of your IRA assets, thus taking far less in withdrawals during your lifetime.
Question: And lastly, failing to assess long term needs.
Answer: Some people think that their cost of living will drop in retirement, but that’s often not the case. With longer life spans and the affect of inflation on your purchasing power, you need a certain amount of growth in your retirement portfolio.
You may want to keep a portion of your assets invested in stocks, which have historically outperformed bonds and cash. A “Golden Rule” of thumb for the percentage of stocks you might consider owning is 100 minus your age.
Jim Lineweaver is a registered representative of and offers securities through Walnut Street Securities, Inc. (WSS) Member NASD/SIPC.
Branch Office:
9050 Sweet Valley Drive,
Valley View, OH 44125
216-520-1711
WSS does not offer tax or legal advice.
Lineweaver Financial Group is not a subsidiary or affiliate of WSS.
Material discussed is for information purposes only and should not be the basis for any investment decisions.
