Tax Incentives to Save
Align your tax strategy with your retirement plan
The April 18th tax deadline is fast approaching, there is still time to reduce taxes and save for retirement. You may qualify to contribute to an IRA, Health Savings Account, or SEP for 2021 (please consult with your CPA).
The limits are as follows for 2021 contributions:
IRA $6K (additional $1K age 50+)
SEP $58K or 25% of total compensation (whichever is less)
HSA $3,600 individual or $7,200 family (additional $1K age 55+)
Please note, IRA and HSA contributions must be done by April 18. SEP-IRA contributions may be made up until filing date, therefore if you file in September or October by extension, you have more time. Again, please confirm with your CPA the type of plan you qualify for and the respective deadline.
Some may have access to a 401K. Contributions must be made in the same calendar year for tax purposes. The limit for this year 2022, is $20,500 (additional $6,500 age 50+).
We believe the biggest risk to a secure retirement is longevity, not the stock market. Most of us underestimate how long we will live. Thanks to medical advances and lifestyle, since 1970 life expectancy has risen by over a decade. The number of centenarians (age 100) is expected to grow significantly globally. A person born 40 years ago has a 19% chance to reach age 100, while a person born 10 years ago has a 30% chance to reach age 100. Innovation in medicine likely sustains this trend. Check out this blood test labeled a ‘game changer’ for its early detection of up to 50 types of cancer. Blood Test Designed To Detect Cancer Early - WebMD
Number of 100-year olds to grow eightfold by 2050
Odds of Living to 100
With longevity comes the likelihood of greater health care expenses in retirement. It is estimated that a 65-year-old couple retiring today may spend $300,000 out of pocket on health care expenses, according to an annual study done by Fidelity. This does not include costs associated with long term care, which will drive costs significantly higher. Too many of us assume Medicare will cover all health care expenses in retirement, it does not.
Plan For Rising Health Care Costs - Fidelity
A great way to save for future health care costs is to contribute to a Health Savings Account (HSA), if you qualify. The money you contribute to an HSA is tax deductible, grows tax deferred, and comes out tax free for health care expenses. The money can be invested to grow for future health care expenses and need not be spent in the year expenses are incurred. If a family were to save $7,200 (max 2021) annually for 25 years growing at 7% they would accumulate $455K in funds available for health care expenses in retirement. Again, if these funds are used for health care expenses, they may be withdrawn tax free.
There are several factors to consider such as desired lifestyle, age, relocation, health condition, and risk tolerance. As a Certified Financial Planner (CFP), I can help you customize a plan that will address your specific needs. Unfortunately, most Americans are simply not saving enough today. I spent 13 years in Florida where retirees would walk into my office, astonished that 1) they were still alive, and 2) the cost of everything! When they retired 30 years ago, they did not foresee that people would pay $5 for coffee and $100,000 for a car.
So, how much do we need to save to be prepared for a retirement that could span 30 or 40 years? An overly simplistic, but a common recommendation among financial planners, is to save at least 15% of annual earnings, with an objective of accumulating a ‘nest egg’ that amounts to approximately 10 times your final salary. Everyone’s situation is different, you may need to save more or less. For perspective, every $1 million dollars saved will provide approximately $40K in annual income from a balanced portfolio, before taxes. How Much To Save For Retirement - Nerd Wallet
Of course, reducing taxes does not always have to involve saving and investing. Strategies involving charitable giving may also help reduce taxes. Please see our blog post from last October regarding charitable giving, using highly appreciated investments as a giving strategy. Share The Wealth (And Reduce Your Taxes)
By building a comprehensive financial plan, we can help you determine how much you must save to sustain your lifestyle in retirement. Together, we can help you achieve your goals.
-Jerry Newman, CFP