3 Things Every Good Retirement Plan Includes
When making a retirement plan, it's natural to focus on how much income you want to generate during retirement (bonus points if you also totted up your likely retirement expenses). While these are indisputably important details in any retirement plan, they're not the only issues you'll need to factor in.
Hitting your retirement income goals won't do you much good if you're handing over way too much of that income to the federal government. While there are steps you can take during retirement to reduce your tax burden, working tax planning into your overall retirement plan can greatly increase your options.
For example, creating nontaxable sources of retirement income will not only lower your federal and state income tax bills, it can also help ensure that your Social Security benefits are not taxed. Of all the potential sources of nontaxable retirement income, a Roth IRA is the hands-down winner. A Roth account's tax benefits are basically the opposite of a traditional retirement savings account's: you don't get a tax break on your contributions, but the money you withdraw from the account is tax-free. A not-inconsiderable side benefit of this system is that dividends and interest you receive in your Roth account are never taxed (dividends and interest paid into a traditional IRA or 401(k) are not taxed when they come in, but you do pay income taxes on this money when you take it out of the account).
Healthcare expenses are a major concern for most Americans, but they're an even bigger issue for retirees: as we age, our medical issues (and the associated costs) typically keep climbing over time. The good news is that once you hit age 65, you'll be able to sign up for Medicare and whichever associated parts of Medicare you decide you need. The bad news is that Medicare doesn't cover some of the health-related expenses you're quite likely to incur.
Long-term care is probably the biggest (and most potentially expensive) health issue that's not covered by any part of Medicare. While you can't do much to prevent the need for long-term care, you can protect yourself from potentially exorbitant long-term care expenses before you retire. The simplest way to do so is to purchase a long-term care insurance policy. The earlier you buy such insurance, the lower your premiums will be; for most people, the best time to buy is in their 50s. If you wait until you're in poor health to shop for long-term care insurance, you may not be able to get a policy at all – and if you can, the premiums will likely be far higher than you can afford.
If you have a family, you'd probably like to leave them something after you're gone. There are countless ways to set up an estate plan, ranging all the way up to exceedingly complicated legal arrangements such as complex trusts and the like. If you want to keep things fairly simple, preserving an IRA for your beneficiaries and perhaps purchasing a life insurance policy are an excellent place to start.
Keeping the money you intend to leave to your family in an IRA is one of the best arrangements you can make: it gives both you and your beneficiaries the side benefit of a nice tax break. In fact, it's such a good deal that the IRS isn't entirely happy with the idea. That's why once you reach age 70 1/2 you'll have to start making required minimum distributions (RMDs) from your traditional IRAs. RMDs are based on your predicted lifespan and are intended to get your retirement account balances as low as possible by the day you die. But Roth IRAs are not subject to RMDs, which makes them a fabulous estate planning tool.
Strictly speaking, life insurance is rarely necessary for retirees. By the time you retire, your dependents are likely quite capable of taking care of themselves, thank you very much. However, life insurance can be a useful estate planning tool because the money that your heirs receive from these policies is not taxed. Life insurance may also be a great choice if you don't have much in the way of assets to leave to your family, or if you have a lot of debt and don't want to stick your beneficiaries with it after you die.
Retirement planning doesn't have to be complicated, but it does need to go further than just income and expenses. If you take steps to resolve the other common retirement concerns, you'll find that that income will go a whole lot further.
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