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Saving $1 Million for Retirement

How can you plan to do it? What kind of financial commitment will it take?

Provided by your Blue Springs Financial Professional Mike Mead, EA, CTC

How many of us will retire with $1 million or more in savings? More of us ought to – in fact, more of us may need to, given inflation and the rising cost of health care.

Sadly, few pre-retirees have accumulated that much. A 2015 Government Accountability Office analysis found that the average American aged 55-64 had just $104,000 in retirement money. A 2016 GoBankingRates survey determined that only 13% of Americans had retirement savings of $300,000 or more.^1,2

 

A $100,000 or $300,000 retirement fund might be acceptable if our retirements lasted less than a decade, as was the case for some of our parents. As many of us may live into our eighties and nineties, we may need $1 million or more in savings to avoid financial despair in our old age. 

The earlier you begin saving, the more you can take advantage of compound interest. A 25-year-old who directs $405 a month into a tax-advantaged retirement account yielding an average of 7% annually will wind up with $1 million at age 65. Perhaps $405 a month sounds like a lot to devote to this objective, but it only gets harder if you wait. At the same rate of return, a 30-year-old would need to contribute $585 per month to the same retirement account to generate $1 million by age 65.³    

The Census Bureau says that the median household income in this country is $53,657. A 45-year-old couple earning that much annually would need to hoard every cent they made for 19 years (and pay no income tax) to end up with $1 million at age 64, absent of investments. So, investing may come to be an important part of your retirement plan.⁴

 

What if you are over 40, what then? You still have a chance to retire with $1 million or more, but you must make a bigger present-day financial commitment to that goal than someone younger.

 

At age 45, you will need to save around $1,317 per month in a tax-advantaged retirement account yielding 10% annually to have $1 million in 20 years. If the account returns just 6% annually, then you would need to direct approximately $2,164 a month into it.⁴

    

What if you start trying to build that $1 million retirement fund at age 50? If your retirement account earns a solid 10% per year, you would still need to put around $2,413 a month into it; at a 6% yearly return, the target contribution becomes about $3,439 a month.⁴

  

This math may be startling, but it is also hard to argue with. If you are between age 55-65 and have about $100,000 in retirement savings, you may be hard-pressed to adequately finance your future. There are three basic ways to respond to this dilemma. You can choose to live on Social Security, plus the principal and yield from your retirement fund, and risk running out of money within several years (or sooner). Alternately, you can cut your expenses way down – share housing, share or forgo a car, etc., which could preserve more of your money. Or, you could try to work longer, giving your invested retirement savings a chance for additional growth, and explore ways to create new income streams. 

 

How long will a million-dollar retirement fund last? If it is completely uninvested, you could draw down about $35,000 a year from it for 28 years. The upside here is that your invested retirement assets could grow and compound notably during your “second act” to help offset the ongoing withdrawals. The downside is that you will have to contend with inflation and, potentially, major healthcare expenses, which could reduce your savings faster than you anticipate.

So, while $1 million may sound like a huge amount of money to amass for retirement, it really is not – certainly not for a retirement beginning twenty or thirty years from now. Having $2 million or $3 million on hand would be preferable.

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

EXPENSES FROM LOOKING FOR WORK MAY BE TAX-DEDUCTIBLE

If you are looking for work, some of the expenses you incur may be tax-deductible, provided that you are looking for work within the same field. Unfortunately, expenses incurred when searching for a job in a new field or a first job are not tax-deductible. 

If you are an employee, job-search expenses are deducted as miscellaneous itemized deductions on Schedule A. Thus, you have to itemize your deductions to gain any benefit. On top of this, miscellaneous itemized deductions are only deductible to the extent that they exceed 2% of your adjusted gross income. Self-employed individuals can deduct expenses related to acquiring new business on Schedule C. 

Travel Expenses – One of biggest expenses related to searching for a job is travel, which may be local or away from home. Deductions for travel expenses when driving locally for job interviews are generally limited to the cost of parking and tolls, plus mileage, which is deducted at the current mileage rate (53.5 cents per mile in 2017) for trips to and from potential job locations and job-placement services. 

If you travel outside your tax home (where you normally live and work) overnight, you may be qualified to deduct, in addition to the auto travel expenses described above, the full cost of overnight lodging and of various forms of transportation (air, bus, train and more), as well as half the cost of meals. 

Résumé Preparation – The costs of having a professional service prepare your résumé are deductible. In addition, you can deduct the costs of résumé reproduction, postageand envelopes for mailing. 

Job-Placement Services – You can generally deduct the fees paid to job-placement agencies when looking for a job.

A few additional tax issues might apply to your situation: 

Unemployment Income – Although some states don’t tax unemployment compensation, that income is taxable income for federal purposes. Generally, no income tax is withheld on unemployment benefits, which may lead to an unpleasant surprise at tax time. 

Health Insurance – If you acquired your insurance through a marketplace, and if your premiums are subsidized with the advance premium tax credit, it is important that you report any changes in circumstances to the marketplace; this includes increases or decreases in income, changes in eligibility for other coverage and changes of address. Advance payments are paid directly to your insurance company to lower the out-of-pocket cost for your health insurance premiums. Reporting changes will help you get the proper type and amount of financial assistance so that you can avoid getting too much or too little in advance.

If you have questions about job-search expenses or other issues related to changing employment, such as pension-plan rollovers and moving-expense deductions, please give our Blue Springs income tax preparation office a call.

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

Dave Ramsey Endorsed Local Provider in Missouri

Mike Mead, EA, CTC, is the Endorsed Local Provider for Missouri income taxes services for the Dave Ramsey Show.

As Dave's Endorsed Local Provider, my team and I are committed, just as Dave is, to providing Biblically based, common sense education and empowerment, seeking to give HOPE to everyone from the financially independent to the financially distressed.

Alliance Financial & Income Tax  provides a faith driven and ethical approach for solving the tax, financial, and accounting challenges of today's marketplace. We strive to learn and understand individual and business financial information, build and maintain long lasting relationships, and provide the highest quality information, service, and products to help bring financial peace.

Dave Ramsey knows first-hand what financial independence means in his own life - living a true rags to riches to rags to riches story. By age 26 he had established a $4 million real estate portfolio (using mostly debt), only to lose it by age 30. He has since rebuilt his financial life and now devotes himself full-time to helping ordinary people understand the forces behind their financial distress and how to set things right - financially, emotionally and spiritually.

Dave rebuilt his financial life and is the host of the nationally syndicated radio program "The Dave Ramsey Show". His radio program is syndicated to more than 400 radio stations nationwide with more than 4 million daily listeners. He has also authored the New York Times best sellers The Total Money Makeover, Financial Peace, More than Enough, and most recently EntreLeadership.

Dave started his company to provide wealth management counseling to the public. The new Financial Peace University (FPU) is a 9-week program that helps people dump their debt, get control of their money, and learn new behaviors around money that are founded on commitment and accountability.  Financial Peace University is also available as a group curriculum to churches and organizations for on-site classes.

What is an ELP?

An Endorsed Local Provider is a tax professional in your area that has been personally chosen by Dave's team based on his or her integrity, professionalism, and experience. ELPs understand and believe in the financial principles that Dave teaches on The Dave Ramsey Show each day.

Why use Dave's ELP?

ELPs are contractually obligated to share the same financial philosophies with you that Dave teaches on the air everyday. Dave's team works with the ELPs everyday to make sure they serve his listeners with high standards of customer service and with the heart of a teacher.

 

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

Tax Rules on Rental Property

Buying or selling income property has definite tax consequences. A taxpayer should clearly understand them, whether he or she intends to acquire a property or put one on the market. 

A sale of income property incurs either a capital gain or loss. If you profit from the sale of income property, that profit is considered fully taxable by the Internal Revenue Service. Fortunately, if you have owned that property for at least a year, you will pay only capital gains tax on those profits rather than income tax.¹

Your capital gain is determined by subtracting the adjusted basis of the property (i.e., the price you paid for it, plus the total of any renovations, closing costs, and eligible legal fees) from the sale price. For most taxpayers, the capital gains rate is but 15%. If you sell an investment property for a capital gain of $30,000 and your capital gains rate is 15%, you will pay $4,500 of capital gains tax from the sale.¹

   

Depreciation can factor into this. If the market turns south and you can deduct $20,000 in depreciation within your ownership period, then your capital gain from the sale is $10,000 instead of $30,000.²

 

Should you happen to sell one investment property at a gain and another at a loss in the same year, you can subtract your capital loss from your capital gain, resulting in a net capital gain or loss for that tax year.¹

Should you buy & hold, you could qualify for the homeowner exclusion. If you live in an investment property for two or more years during a five-year period, the I.R.S. will consider that investment property to be your primary residence, whether you do or not. You are, thereby, eligible for the federal homeowner exclusion when you sell such property, which enables you to shield up to $250,000 of capital gains from tax. Joint filers may exclude up to $500,000 of capital gains from tax through this break.^1,3

  

Income property investors may also qualify for some federal tax deductions. If you happen to utilize an investment property (or even a vacation home) for your personal use, you may be able to take advantage of property tax deductions, the mortgage interest deduction, even the home office deduction. The size of a deduction typically corresponds to how frequently you use the property. For example, you can deduct property management fees, insurance premiums, and certain other costs only when you use the property for longer than 14 days or 10% of the total days it is rented or leased.⁴

 

This article is simply an overview of the tax rules on rental property. To fully explore the tax implications of a sale or purchase and the deductions and exclusions you may qualify to receive, speak to a qualified tax, real estate, or financial professional today.

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

    

Citations.

1 - finance.zacks.com/tax-liability-selling-investment-property-5957.html [3/28/17]

2 - investopedia.com/articles/mortgages-real-estate/08/rental-property.asp [2/22/17]

3 - irs.gov/taxtopics/tc701.html [1/7/17]

4 - ajc.com/business/personal-finance/these-tax-breaks-can-help-make-homeownership-more-affordable/1rauoRXHzDmeWZVgbfmsoI [3/16/17]

Saving $1 Million for Retirement

How can you plan to do it? What kind of financial commitment will it take?

Provided by Mike Mead, EA, CTC

How many of us will retire with $1 million or more in savings? More of us ought to – in fact, more of us may need to, given inflation and the rising cost of health care.

Sadly, few pre-retirees have accumulated that much. A 2015 Government Accountability Office analysis found that the average American aged 55-64 had just $104,000 in retirement money. A 2016 GoBankingRates survey determined that only 13% of Americans had retirement savings of $300,000 or more.^1,2

 

A $100,000 or $300,000 retirement fund might be acceptable if our retirements lasted less than a decade, as was the case for some of our parents. As many of us may live into our eighties and nineties, we may need $1 million or more in savings to avoid financial despair in our old age. 

The earlier you begin saving, the more you can take advantage of compound interest. A 25-year-old who directs $405 a month into a tax-advantaged retirement account yielding an average of 7% annually will wind up with $1 million at age 65. Perhaps $405 a month sounds like a lot to devote to this objective, but it only gets harder if you wait. At the same rate of return, a 30-year-old would need to contribute $585 per month to the same retirement account to generate $1 million by age 65.³    

The Census Bureau says that the median household income in this country is $53,657. A 45-year-old couple earning that much annually would need to hoard every cent they made for 19 years (and pay no income tax) to end up with $1 million at age 64, absent of investments. So, investing may come to be an important part of your retirement plan.⁴

 

What if you are over 40, what then? You still have a chance to retire with $1 million or more, but you must make a bigger present-day financial commitment to that goal than someone younger.

 

At age 45, you will need to save around $1,317 per month in a tax-advantaged retirement account yielding 10% annually to have $1 million in 20 years. If the account returns just 6% annually, then you would need to direct approximately $2,164 a month into it.⁴

    

What if you start trying to build that $1 million retirement fund at age 50? If your retirement account earns a solid 10% per year, you would still need to put around $2,413 a month into it; at a 6% yearly return, the target contribution becomes about $3,439 a month.⁴

  

This math may be startling, but it is also hard to argue with. If you are between age 55-65 and have about $100,000 in retirement savings, you may be hard-pressed to adequately finance your future. There are three basic ways to respond to this dilemma. You can choose to live on Social Security, plus the principal and yield from your retirement fund, and risk running out of money within several years (or sooner). Alternately, you can cut your expenses way down – share housing, share or forgo a car, etc., which could preserve more of your money. Or, you could try to work longer, giving your invested retirement savings a chance for additional growth, and explore ways to create new income streams. 

 

How long will a million-dollar retirement fund last? If it is completely uninvested, you could draw down about $35,000 a year from it for 28 years. The upside here is that your invested retirement assets could grow and compound notably during your “second act” to help offset the ongoing withdrawals. The downside is that you will have to contend with inflation and, potentially, major healthcare expenses, which could reduce your savings faster than you anticipate.

So, while $1 million may sound like a huge amount of money to amass for retirement, it really is not – certainly not for a retirement beginning twenty or thirty years from now. Having $2 million or $3 million on hand would be preferable.

For Blue Springs retirement planning contact Mike today at 816-220-2001.

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

Citations.           

1 - investopedia.com/articles/personal-finance/011216/average-retirement-savings-age-2016.asp [12/8/16]

2 - time.com/money/4258451/retirement-savings-survey/ [3/14/16]

3 - interest.com/retirement-planning/news/how-to-save-1-million-for-retirement/ [12/12/16]

4 - reviewjournal.com/business/money/how-realistically-save-1-million-retirement [5/20/16]

Should You Apply for Social Security Now or Later?

When should you apply for benefits? Consider a few factors first. 

Now or later? When it comes to the question of Social Security income, the choice looms large. Should you apply now to get earlier payments? Or wait for a few years to get larger checks?

 

Consider what you know (and don’t know). You know how much retirement money you have; you may have a clear projection of retirement income from other potential sources. Other factors aren’t as foreseeable. You don’t know exactly how long you will live, so you can’t predict your lifetime Social Security payout. You may even end up returning to work again.

 

When are you eligible to receive full benefits? The answer may be found online at socialsecurity.gov/retire2/agereduction.htm.

 

How much smaller will your check be if you start receiving benefits at 62? The answer varies. As an example, let’s take someone born in 1955. For this baby boomer, the full retirement age is 66 years and 2 months. If that boomer decides to retire in 2017 at 62, his or her monthly Social Security benefit will be reduced about 26%. That boomer’s spouse would see a 30% reduction in monthly benefits.^1,2

 

Should that boomer elect to work past full retirement age, his or her benefit checks will increase by 8.0% for every additional full year spent in the workforce. So, it really may pay to work longer.²

 

Remember the earnings limit. Let’s put our hypothetical baby boomer through another example. Our boomer decides to apply for Social Security at age 62 in 2017, yet stays in the workforce. If he/she earns more than $16,920 in 2017, the Social Security Administration will withhold $1 of every $2 earned over that amount.³

 

How does the SSA define “income”? If you work for yourself, the SSA considers your net earnings from self-employment to be your income. If you work for an employer, your wages equal your earned income.³

 

Please note that the SSA does not count investment earnings, interest, pensions, annuity income, and government or military retirement benefits toward the current $16,920 earnings limit.³

  

Some fine print worth noticing. If you are self-employed, did you know that the SSA may define you as retired even if you aren’t? (This amounts to the SSA giving you a break.)

 

For example, if you are eligible to receive Social Security benefits in 2017, yet remain under full retirement age for the whole year, the SSA will consider you “retired” if a) you work 45 hours or less per month at your business or work between 15-45 hours a month at a business in a highly skilled occupation, b) your monthly earnings from such self-employment are $1,410 or less.⁴

 

Here’s the upside of all that: if you meet the two tests mentioned in the preceding paragraph, you are eligible to receive a full Social Security payment for any whole month of 2017 in which you are “retired” under these definitions. You can receive that monthly payment no matter what your earnings total for 2017.⁴

 

Learn more at socialsecurity.gov. The SSA website is information packed and user friendly. One last, little reminder: if you don’t sign up for Social Security at your full retirement age, make sure that you at least sign up for Medicare at age 65.

For assistance with your Blue Springs financial planning contact us today at 816-220-2001

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
AFITOnline.com

Who is Alliance Financial & Income Tax

Citations.

1 - blog.ssa.gov/2017-brings-new-changes-to-full-retirement-age/ [1/6/17]

2 - fool.com/retirement/general/2016/04/25/3-facts-you-need-to-know-about-social-security-spo.aspx [4/25/16]

3 - ssa.gov/planners/retire/whileworking2.html [4/12/17]

4 - ssa.gov/planners/retire/rule.html [4/12/17]