Retirement, or the conclusion of daily work demands, is an aim for many workers. For some, it requires a lengthy wait to realize a dream while for others, retirement may come early. The Life Insurance and Market Research Association (LIMRA) indicates that 69% of Americans retire by age 66, with 11% still working at age 75, and the most common retirement age is 62. However, over 24% of currently living retirees report retiring before age 55. When dreaming of retiring early, the questions should be, “How can I do that financially?” and “What tax tips do I need to follow that will guide me through successful retirement?”
The Benefits of Retirement
Retirement can offer these benefits:
- It can be good for physical health including sleeping later and longer, getting outside for more fresh air and sunshine, not skipping meals, or jamming in meals between work periods. And a reduction in time demands and stress can be beneficial to one’s mental health as well.
- It can provide more opportunities to travel and to spend time with loved ones.
- It can provide an opportunity to explore new hobbies, offer church or community service, and explore other new possibilities.
The Challenges of Early Retirement
Seizing the opportunity to retire early presents some challenges including:
- Finding and keeping affordable health insurance.
- Planning, coordinating, and properly executing financial resources, including making available funds last for a long time.
- Dealing with the periodic need for more income.
- Dealing with the challenge of spending more than you can afford to spend. Said another way, dealing with lifestyle inflation on a static income.
- Maintaining a healthy social life.
Retirement Tax Tips
It is vitally important to plan carefully for retirement, especially early retirement, so use these tax tips to help plan wisely:
- Deal with all existing debt immediately. The best time to resolve and pay off debt is while you are still working to eliminate the burden and restrictions of credit card debt, loans, and even mortgages.
- Start “retirement spending” now. Don’t wait to examine and reduce expenses.
- Work on a health insurance strategy. That includes getting affordable insurance and planning for Medicare.
- Consider Health Savings Accounts and their catch up provisions. This allows you to set money aside for specifically qualified health expenses in pre-tax dollar terms.
- Reassess your investments, considering these investment possibilities:
- Interest on municipal bonds is free from federal income tax.
- Qualified dividends are taxed at lower rates than ordinary income.
- Losses can be used to offset capital gains.
- Invest in deferred annuities.
- Maximize tax-advantaged retirement accounts like IRAs and401(k)s which will allow you to save pre-tax money.
- You can roll money from some retirement accounts into Roth Rollover accounts. That means that you will be taxed on the amount rolled over, but future earnings are considered tax-free.
- Be strategic about the timing of receiving social security benefits. If benefits are taken before the age of 70, they will be reduced.
- Consider state taxes. Early retirement may be an incentive to move to a state that has lower or no state income taxes. States are prevented by law from taxing residents on retirement benefits earned in another state.
- Get professional financial and accounting assistance in implementing these tax tips.
Get Expert Accounting and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.