Planning for retirement involves understanding various aspects of how your income will be managed and taxed. Here, we address some of the most commonly asked questions about retirement income to help you navigate your financial future.
Is Retirement Income Taxable?
Yes, retirement income can be taxable, depending on the source. Common taxable retirement income includes:
- Traditional IRA and 401(k) Withdrawals: These are typically taxed as ordinary income.
- Social Security Benefits: Up to 85% of your Social Security benefits can be taxable if your combined income exceeds certain thresholds.
- Pensions: Payments from pensions are usually taxable at your ordinary income tax rate.
- Annuities: The portion of the annuity that represents earnings is taxable.
What is a Good Monthly Retirement Income?
A good monthly retirement income varies based on individual needs and lifestyle. However, a common guideline is the 80% rule, suggesting you need 80% of your pre-retirement income to maintain your standard of living. For example, if you earned $100,000 annually before retirement, you might aim for $80,000 per year in retirement, or about $6,666 per month.
What Percent of Income Should Go to Retirement?
Financial experts often recommend saving 15% of your annual income for retirement, starting as early as possible. This percentage can vary based on your age, retirement goals, and other factors.
Which States Do Not Tax Retirement Income?
Several states do not tax retirement income, making them attractive for retirees. These states include:
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming Additionally, states like Illinois, Mississippi, and Pennsylvania do not tax distributions from 401(k) plans, IRAs, or pensions.
Is Social Security Income Taxable?
Social Security income can be taxable, depending on your total income. If your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits) exceeds $25,000 for single filers or $32,000 for married couples filing jointly, a portion of your benefits may be taxable.
How Does Inflation Affect Retirement Income?
Inflation reduces the purchasing power of your money over time, which can significantly impact your retirement income. For example, an inflation rate of 3% per year can halve the value of your money in about 24 years. It’s crucial to consider investments and income sources that provide cost-of-living adjustments (COLAs) to help offset inflation, such as Social Security benefits and inflation-protected securities.
What Role Do Health Care Costs Play in Retirement Planning?
Health care costs are one of the most significant and often underestimated expenses in retirement. As people age, health care needs generally increase, and these costs can consume a large portion of retirement income. It’s estimated that a 65-year-old couple retiring in 2023 might need around $300,000 to cover health care expenses throughout retirement, excluding long-term care. Planning for these costs is essential to ensure that your retirement savings can sustain your lifestyle without being depleted by medical expenses.
Consider incorporating health savings accounts (HSAs), long-term care insurance, and Medicare planning into your retirement strategy to manage these potential expenses effectively.
Changing Your Mindset: From Saving to Spending
Transitioning from saving to spending in retirement can be challenging. After years of accumulating wealth, the mindset shift to drawing down those assets requires careful planning and a psychological adjustment. Here are some tips to ease the transition:
- Create a Withdrawal Plan: Develop a strategy for how much to withdraw annually, ensuring it aligns with your retirement goals and longevity expectations.
- Adjust Your Budget: Understand your retirement expenses and adjust your budget to ensure your withdrawals meet your needs without depleting your savings too quickly.
- Seek Professional Guidance: Working with a financial advisor can provide reassurance and help optimize your withdrawal strategy.
It is important to note that everyone’s situation is different, which is why proper planning is essential. At Kowal Investment Group, we specialize in helping individuals navigate the complexities of retirement planning. Together, we can help create a plan best suited for your specific needs. Contact us today to ensure your retirement income strategy is aligned with your financial goals.
Let’s work together! Start planning with us to build a retirement that offers both security and peace of mind.
Disclosures:
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of Kowal Investment Group, we do not render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Kowal Investment Group, LLC (“Kowal”) is a Registered Investment Advisor. Kowal will maintain all applicable registration and licenses as required by the various states in which Kowal conducts business, as applicable. Kowal does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have a general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.
