How Much Retirement Income Will You Really Need?

Many people underestimate lifestyle costs, medical expenses and inflation.

What is enough? What is not enough? If you’re considering retiring in the near future, you’ve probably heard or read that you need about 70% of your end salary to live comfortably in retirement. This estimate is frequently repeated … but that doesn’t mean it is true for everyone. It may not be true for you.

You won’t learn how much retirement income you’ll need by reading this article. You’ll want to meet with a qualified retirement planner who can help you plan to estimate your lifestyle needs and short-term and long-term expenses.

That said, there are some factors which affect retirement income needs – and too often, they go unconsidered.

Health. Most of us will face a major health problem at some point in our lives – perhaps even multiple or chronic health problems. We don’t want to think about that reality. But if you’re a new retiree, think for a moment about the costs of prescription medicines, and recurring treatment for chronic ailments. These minor and major costs can really take a bite out of retirement income, even with a great health care plan. While generics have slowed the advance of prescription drug costs to about 1-2% a year recently,¹ one estimate found that a 65-year-old who retired in 2007 would need $215,000 to pay for overall retirement health care costs – up about 7.5% from 2006.²

Heredity. If you come from a family where people frequently live into their 80s and 90s, you may live as long or longer. Imagine retiring at 55 and living to 95 or 100. You would need 40-45 years of steady retirement income.

Portfolio. Many people retire with investment portfolios they haven’t reviewed in years, with asset allocations that may no longer be appropriate. New retirees sometimes carry too much risk in their portfolios, with the result being that the retirement income from their investments fluctuates wildly with the vagaries of the market. Other retirees are super-conservative investors: their portfolios are so risk-averse that they can’t earn enough to keep up with even moderate inflation, and over time, they find they have less and less purchasing power.

Spending habits. Do you only spend 70% of your salary? Probably not. If you’re like many Americans, you probably spend 90% or 95% of it. Will your spending habits change drastically once you retire? Again, probably not. Most people only change spending habits in response to economic necessity or in pursuit of new financial goals. People don’t want to “live on less” once they have had “more”.

Social Security (or lack thereof). In 2005, SSI represented 39% of a typical 65-year-old retiree’s income. But by 2030, Social Security may only replace 29% of that income, after deductions for Medicare premiums and income taxes. Since 1983, retirees earning more than $25,000 in SSI have had to pay income tax on a portion of their benefits.³ This is all presuming Social Security is still around in 2030.

So will you have enough? When it comes to retirement income, a casual assumption may prove to be woefully inaccurate. Meet with a qualified retirement planner while you are still working to discuss these factors and estimate how much you will really need.

 

 

These are the views of Peter Montoya Inc., not Statler Financial Services, Inc., and should not be construed as investment advice. Statler Financial Services, Inc., does not give tax or legal advice. All information is believed to be from reliable sources; however, w­­e make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Statler Financial Services, Inc. is registered as an investment adviser with the state of Florida. The presence of this Web site on the Internet shall in no direct or indirect way to be construed or interpreted to suggest Statler Financial Services, Inc. is soliciting to sell advisory services or offering to sell advisory services to residents of any other state other than the state of Florida.

 

Citations.

¹ nytimes.com/2007/09/21/business/21generic.html?_r=1&oref=slogin

² marketwatch.com/news/story/health-care-costs-retirement-rise/story.aspx?guid=%7bEF2B6CDA-E176-4747-B528-76AC814051C5%7d&print=true&dist=printTop

³ money.cnn.com/2007/05/14/pf/retirement/nasi__report/index.htm

 

How Much Retirement Income Will You Really Need?

Many people underestimate lifestyle costs, medical expenses and inflation.

What is enough? What is not enough? If you’re considering retiring in the near future, you’ve probably heard or read that you need about 70% of your end salary to live comfortably in retirement. This estimate is frequently repeated … but that doesn’t mean it is true for everyone. It may not be true for you.

You won’t learn how much retirement income you’ll need by reading this article. You’ll want to meet with a qualified retirement planner who can help you plan to estimate your lifestyle needs and short-term and long-term expenses.

That said, there are some factors which affect retirement income needs – and too often, they go unconsidered.

Health. Most of us will face a major health problem at some point in our lives – perhaps even multiple or chronic health problems. We don’t want to think about that reality. But if you’re a new retiree, think for a moment about the costs of prescription medicines, and recurring treatment for chronic ailments. These minor and major costs can really take a bite out of retirement income, even with a great health care plan. While generics have slowed the advance of prescription drug costs to about 1-2% a year recently,¹ one estimate found that a 65-year-old who retired in 2007 would need $215,000 to pay for overall retirement health care costs – up about 7.5% from 2006.²

Heredity. If you come from a family where people frequently live into their 80s and 90s, you may live as long or longer. Imagine retiring at 55 and living to 95 or 100. You would need 40-45 years of steady retirement income.

Portfolio. Many people retire with investment portfolios they haven’t reviewed in years, with asset allocations that may no longer be appropriate. New retirees sometimes carry too much risk in their portfolios, with the result being that the retirement income from their investments fluctuates wildly with the vagaries of the market. Other retirees are super-conservative investors: their portfolios are so risk-averse that they can’t earn enough to keep up with even moderate inflation, and over time, they find they have less and less purchasing power.

Spending habits. Do you only spend 70% of your salary? Probably not. If you’re like many Americans, you probably spend 90% or 95% of it. Will your spending habits change drastically once you retire? Again, probably not. Most people only change spending habits in response to economic necessity or in pursuit of new financial goals. People don’t want to “live on less” once they have had “more”.

Social Security (or lack thereof). In 2005, SSI represented 39% of a typical 65-year-old retiree’s income. But by 2030, Social Security may only replace 29% of that income, after deductions for Medicare premiums and income taxes. Since 1983, retirees earning more than $25,000 in SSI have had to pay income tax on a portion of their benefits.³ This is all presuming Social Security is still around in 2030.

So will you have enough? When it comes to retirement income, a casual assumption may prove to be woefully inaccurate. Meet with a qualified retirement planner while you are still working to discuss these factors and estimate how much you will really need.

 

These are the views of Peter Montoya Inc., not Statler Financial Services, Inc., and should not be construed as investment advice. Statler Financial Services, Inc., does not give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

 

Statler Financial Services, Inc., is registered as an investment adviser with the state of Florida. The presence of this Web site on the Internet shall in no direct or indirect way to be construed or interpreted to suggest Statler Financial Services, Inc., is soliciting to sell advisory services or offering to sell advisory services to residents of any other state other than the state of Florida.

 

Citations.

¹ nytimes.com/2007/09/21/business/21generic.html?_r=1&oref=slogin

² marketwatch.com/news/story/health-care-costs-retirement-rise/story.aspx?guid=%7bEF2B6CDA-E176-4747-B528-76AC814051C5%7d&print=true&dist=printTop

³ money.cnn.com/2007/05/14/pf/retirement/nasi__report/index.htm

 

 

Taxing the Rich to Pay for Health Care

That’s part of the plan. How will you be affected?

In 2013, wealthy Americans will pay extra Medicare taxes. Congress, President Obama and the IRS are putting a surcharge on the wealthy to help fund the health care reforms.

• Beginning in 2013, joint filers with adjusted gross incomes of $250,000 or greater and single filers with AGI of $200,000 or greater will have to pay 0.9% extra in FICA taxes (that is, Social Security and Medicare taxes). The employers of these taxpayers face no such increase.¹
• Also, joint filers with modified adjusted gross income (MAGI) of $250,000 or more and single filers with MAGI of $200,000 or more will be docked with a 3.8% tax on investment income. (Even estates and trusts will be subject to this new 3.8% levy.)¹

What might the dollar impact be? The Tax Foundation, a politically conservative watchdog organization, thinks that the richest 1% of American families will pay an average of $52,000 more in federal taxes by 2016.²

What are the chances of these tax hikes being repealed? Think slim and none. Basically, you’d have to repeal the health care reforms to make it happen.

How can you avoid the 3.8% tax on dividends, capital gains & interest? It won’t be easy. Real estate investors may luck out the most, because federal law characterizes rental income as “active” rather than “passive”. On the other hand, if you sell a home you’ve owned for decades and see a taxable gain above the home sale exclusion ($250,000 single, $500,000 married), you’ll face the 3.8% tax.¹

Some forms of unearned income won’t be slapped with the tax. IRA distributions and income distributions from 401(a), 403(b) and 457(b) plans will be exempt. The same goes for pension income and Social Security income. Annuities that are part of a pension plan will be exempt. Any income from a business that you participate in won’t be hit with the 3.8% tax. Veterans’ benefits, life insurance payouts and interest earned by municipal bonds will also be spared.^1,3

As a result of this tax, you might start to see subtle shifts in financial strategy. You might see more muni bond purchases, more interest in life insurance, and more installment sales. As qualified Roth IRA distributions don’t boost AGI, you might be looking at another factor promoting Roth IRA conversions.³ Everybody will think about taking some capital gains prior to 2013.

The richest Americans have paid less tax in recent decades. Wealth for the Common Good (a liberal non-profit looking at this matter) notes that in 1955, the 400 largest incomes in America paid 51.2% of those incomes back in federal taxes. That led to the “tax shelters” of the 1960s and 1970s. In comparison, the top 400 incomes in America in 2007 paid out only an average of 16.6% in federal taxes.²

So how can you reduce your taxes in 2013? It is not too early to think about it. You might want to devote a planning session to this topic, or start to read up on your options.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of Statler Financial Services, Inc. This information should not be construed as investment advice. Statler Financial Services, Inc. does not give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.. http://www.petermontoya.com, http://www.montoyaregistry.com, http://www.marketinglibrary.net

Statler Financial Services, Inc. is registered as an investment adviser with the state of Florida. The presence of this Web site on the Internet shall in no direct or indirect way to be construed or interpreted to suggest Statler Financial Services, Inc. is soliciting to sell advisory services or offering to sell advisory services to residents of any other state other than the state of Florida.

Citations

1 – online.wsj.com/article/SB10001424052748703890904575297351898565426.html [6/12/10]

2 – csmonitor.com/Commentary/David-R.-Francis/2010/0503/Wealthy-Americans-shoulder-health-care-tax-burden [5/3/10]

3 – projo.com/opinion/contributors/content/CT_healthlaw27_05-27-10_86IIRQ8_v11.8fa6649.html [5/27/10]

4 – irs.gov/publications/p590/ch02.html#en_US_publink1000231071 [2009]

Clearing Up the Health Care Debate

Who would fund the reforms? Would there really be a “death list”?

Sorting out the possibilities, facts and misconceptions.

The town hall debates over health care reform have ignited Americans like few recent issues. Discourses have become shouting matches. Away from the noise, here is a roundup of where things currently stand.

Who would pay for all this? Over the next 10 years, the federal government will need (by President Obama’s estimation) $950 billion to fund its health care programs. As planned, roughly a third of the money will be raised through increased revenues (i.e., limiting tax deductions for the wealthiest Americans) and two-thirds of it is supposed to come from reallocations of taxpayer money the federal government is already scheduled to receive.¹ A coalition of pharmaceutical industry CEOs met with the President in July and have since pledged $80 billion in cost savings over the coming decade to help pay for the reform.²

Would Medicare be cut? Republicans and Democrats disagree. “Nobody is talking about trying to change Medicare benefits,” President Obama stated during a July AARP teleconference. “What we want to do is to eliminate some of the waste that is being paid for out of the Medicare trust fund.” The non-partisan Congressional Budget Office figures that the House of Representatives version of the bill would trim Medicare spending by $500 billion across the next decade with no impact on Medicare benefits. AARP claims that “none of the health care reform proposals being considered by Congress would cut Medicare benefits or increase your out-of-pocket costs for Medicare services.” However, in an August 15 Republican Party radio address, Sen. Orrin Hatch contended that “hundreds of billions of dollars” will be cut from Medicare and used to “expand a financially-strapped Medicaid program and create another government-run plan.”^3,4

Would this run up the deficit further? The Congressional Budget Office says yes. It forecasts that President Obama’s reforms would add $239 billion to the federal deficit. Few on Capitol Hill think the reform effort could pay for itself.⁵

Would health care be rationed? That’s what ex-Alaska Governor Sarah Palin contended in a Facebook post. The potential Republican presidential candidate stated that the reforms would lead to a system that would “refuse to allocate medical resources to the elderly, the infirm, and the disabled who have less economic potential.” Democrats and other supporters of the reforms counter her claim by saying that the current health care system already features “rationed” care dictated by health insurance company bureaucrats.⁶

Would there really be “death panels”? Earlier this month, Palin contended that the President’s health care reform proposals included “death panels” that would decide if seriously ill patients would live or die. In the eyes of many legislators, Palin was wildly misinterpreting a provision in the health care reform bill that would allow doctors to offer voluntary consultations about living wills, hospice care, health care directives and pain medication to patients and loved ones facing end-of-life decisions. (If the reforms pass, Medicare would pay physicians to provide this consulting.) The Senate Finance Committee has dropped this idea from its version of the proposed legislation; it remains in the House version.⁷

Would the government (and taxpayer dollars) pay for abortions? It is uncertain. In one variant of the health care reform bill, abortions would have to be available via at least one insurance plan; however, Democrats say any abortions would be paid through patient premiums.⁵

Would undocumented immigrants get free health care? On the CBS Evening News, Sen. Ben Cardin (D-MD) was heard stating, “Illegal aliens will not be in this bill, period, the end.” As currently written, the legislation states that only those lawfully present in the United States can qualify for health coverage. Yet what if one family member is in America legally, but others aren’t? Could his or her relatives become eligible? Republicans say that the proposed legislation offers no way to effectively stop undocumented immigrants from applying for health care benefits.⁵

The debate rages on. Politically, the health care reform effort seems poised to end up being the story of the year – and the contention and negotiation will certainly last into fall. Stay tuned.

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These are the views of Peter Montoya Inc., not Statler Financial Services, Inc. and should not be construed as investment advice. Statler Financial Services, Inc. does not give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Statler Financial Services, Inc. is registered as an investment adviser with the state of Florida. The presence of this Web site on the Internet shall in no direct or indirect way to be construed or interpreted to suggest Statler Financial Services, Inc. is soliciting to sell advisory services or offering to sell advisory services to residents of any other state other than the state of Florida.

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Citations.
1 baltimoresun.com/health/health-care/bal-health care-faq,0,5260471.story [8/14/09]
2 baltimoresun.com/business/bal-bz.pharma14aug14,0,5384283.story [8/14/09]
3 politics.theatlantic.com/2009/08/gop_dems_want_to_spend_money_to_cut_medicare.php    [8/14/09]
4 factcheck.org/2009/08/seven-falsehoods-about-health-care/    [8/14/09]
5 cbsnews.com/stories/2009/08/12/eveningnews/main5237960.shtml [8/12/09]
6 politicalticker.blogs.cnn.com/2009/08/14/palin-warns-of-disturbing-health-care-rationing/    [8/14/09]
7 latimes.com/news/nationworld/nation/la-na-health-end-of-life14-2009aug14,0,4670272.story    [8/14/09]