Savings and Tax Time

In a month, personal income taxes are due. You still have time to fund a Regular IRA or a Roth IRA for calendar year 2015.

IRAs are a good way to save for retirement and everyone who can afford to fund an IRA, should consider doing it. There are different eligibility rules for each and which one you should use depends on many factors.

Among the key factors for picking between an IRA and a Roth are your current and future tax rates, when you’ll need the money and where it’s going.

If your tax rate is low now and may be higher in retirement, you might be more inclined to fund a Roth. If your tax rates are the reverse — high now, and low later — you’d be more likely to do an IRA.

Except for higher income people, contributions to an IRA are deductible but taxable on withdrawal. Roth contributions get no deduction but aren’t taxable if taken out after the account has been open for five years and the holder is over age 59 1/2.

If some of your money might go to a charity, a Regular IRA would be good since you won’t owe tax on the distribution (up to $100,000) if you are older than 70 1/2.

If you are younger than 50, you can contribute $5,500 to an IRA or Roth as can your spouse. Those older than 50 can contribute an extra $1,000 annually.

The younger you are, the more time your investments have to work for you. Regular contributions to IRAs or Roths can be a key part of your retirement savings.


Big Changes to Social Security

This fall two Social Security “aggressive claiming strategies” were eliminated. This is the biggest change in Social Security in more than a decade.

These changes will affect when many couples should claim their retirement benefits. For people who turned 62 by Dec. 31, the major strategy is still available. For those older than 66 by the end of April, another strategy remains available until April 29.

While both strategies had been on the books for at least 15 years, they have gained attention recently.

Social Security is bigger and more complicated than most people realize. The benefits amount to five percent of gross national product and are the bedrock of most people’s retirement.

Coordinating Social Security benefits with the rest of your assets and plans is an important part of preparing for a comfortable retirement. Maximizing your benefits means taking into account your work plans, your partner, your tax strategy and the deployment of your other assets.

Many people make spur of the moment decisions on Social Security and pensions and may never realize why their hopes and dreams go awry. Failure to make the correct decisions can cost tens of thousands of dollars.

We talk to people frequently about these issues and are happy to help.


The Sun Doesn’t Always Shine

We now have a solar roof and it takes care of our electrical needs on sunny days but the sun doesn’t always shine. At night, our panels rest. During storms and very cloudy days, the panels aren’t at peak efficiency.

Yet when it comes to personal finances, I generally come across people whose planning assumes that the sun will always shine.

Many of these people are do it yourselfers where one partner in a couple handles the finances and does it well. But what happens when that person gets too busy or injured or sick or passes away?

What about when old age and diminished mental capacity don’t permit them to perform in the way they’d like?

What happens to a couple who are living together for many years when the storms finally roll in?

Not long ago, someone asked me what happens if the bull market ends? Will the stock market go down?

I told him the question is wrong. We know the market always goes up and down.

The long-term trend for a century has been up but we know the market will go down and we need to plan for that.

We enjoy the sunshine and warm weather, the lazy days of summer. But we don’t throw out our umbrellas and raincoats and keep our flashlights handy.

We know that the sun doesn’t always shine and we always need to keep in mind the possibility of stormy days ahead and prepare accordingly.


Aging and Financial Skills


Diminished Ability to Handle Personal Finances

As people age, they gradually lose their ability to handle their own finances. Often, this process is so gradual that the person himself and those around him are unaware of what’s happening until something serious happens. The elderly control the most assets and are the most susceptible to financial scams and poor choices. As people get older, their financial affairs often get more complex. They must deal with complex choices on healthcare, long-term care, taxes, life insurance, pensions, Social Security and estate planning. Often just handling the routine chores of daily financial affairs become beyond reach. Recently The New York Times had an article discussing the research behind the loss of cognitive skills needed for personal finance. Steps to mitigate these inevitable problems include striving to simplify your financial affairs — consolidating your holdings in a small number of financial institutions, trimming your actual number of holdings, avoiding complex or exotic instruments. Another common solution is to use automatic bill paying where possible. People should also find trusted family members, friends or professionals who can step in when needed. Appropriate advanced directives such as powers of attorney and health care proxies also need to be in place. Planning for the inevitable will help avoid many of the worst potential pitfalls.


How Much Money Do You Need to Retire?


Planning for Retirement
Often I am asked how much money is enough for retirement?

On the surface, it’s a simple and logical question but in reality it’s quite complex. Almost always, the answer is “it depends.”

When are you planning to retire? Age 50? 60? 75? Never? Where are you going to retire? Manhattan? Orlando? Rural Oklahoma? It makes a big difference. Most people would agree that it takes more money to retire in Manhattan than Oklahoma. But what if you have a cheap rent controlled apartment and no car.

In general, most people have an exaggerated idea of how much money it takes to retire and don’t fully appreciate the size of their resources. Sometimes I come across people who face a hopeless situation.

But more often, I talk to people who are unnecessarily worried and don’t realize how large their Social Security and pension or 401-K are.

Their concerns are not harmless; they can lead to bad decisions.

The first step to a good retirement is a realistic assessment of your spending needs and a full tally of your resources. Neither task is simple.

If you are confused and concerned about retirement, we can help.