To help reduce your tax burden once you retire, and free up more money for expenses and fun, give income planning a try. Here are four ways to adjust your income and get a better grip on your tax bill.
By JOEL HARDIN, APMA®, NSSA® | City Center Financial LLC
Many people — some with retirement plans already in place — have no idea what their spending will look like in retirement.
Why is this important? Because if you don’t know how much you’re planning to spend in retirement, you don’t know how much income you’ll need to cover those expenses. And if you don’t know those two key pieces of information, any retirement plan that you have isn’t worth the paper it’s printed on. It’s impossible to aim if you don’t know where the target is.
Fortunately, the answer to this question isn’t complicated at all. In fact, it’s simple if you aren’t planning any lifestyle changes in retirement. If you are, it’s a bit more challenging, but still easy to figure out with some simple math.
Beyond ensuring that your income is sufficient to meet your expenses over a potentially 35-year-long retirement, understanding your expenses and income can provide significant insight into your tax situation. By strategically managing your income and expenses during retirement, you can potentially position yourself to lower your tax bill on an ongoing basis.
How to determine your expenses
Figuring out your expenses is easy, even using back-of-the-napkin math. If you’re still working, write down your take-home pay — that is, your pay after taxes, any 401(k) contributions and any health or life insurance premiums. How much do you generally have left over at the end of the month after paying your bills? If you don’t have anything left, are you digging into savings or incurring credit card debt to fund your lifestyle?
Let’s say your take-home pay is $5,000 a month and you have $500 left over at the end of the month. That puts your current expenses at $4,500 a month. From there, you can make adjustments to your estimated future need by adding in any new expenses that you may be forced to pay out of pocket once you finally retire, like life and health insurance premiums. You’ll also need to add in any expenses that will result from lifestyle changes, such as additional vacations, a second home or helping your children or grandchildren.
If you want to be more systematic, you can…