Do you ever think about retirement? For most of us, our vision of retirement is all sunshine and rainbows because we picture ourselves basking in the sun with an umbrella drink, listening to the sweet sounds of the ocean waves. This might very well happen, but have you ever thought about the transition that has to take place before this lifestyle becomes a reality? The satisfaction of earning paychecks with your hard work is now over, and you must now survive on your savings. How in the world is this done? And, how do you get used to this whole new way of life?
My Retirement Lesson
I am very fortunate to work for a caring company. The pay is good, the benefits are great, and I always get the feeling that the executives truly care about the employees. For example, not only does the company match our 401(k) investments, but they also offer a class to all employees that are interested in learning about retirement. Now, I’m only 26 years old (and my wife is only 23), but we want to make sure that we have a plan for our retirement too! So, we attended class 1 of 4 last Tuesday and learned quite a lot!
That Transition Into Retirement
This transition from the workforce to retirement is actually something that I never thought of. Once you retire, there’s hardly any income coming in (for most of us), and you’re basically living off the money that you’ve been socking away for the past 40 years!
Now, rather than looking forward to that next paycheck, you’re withdrawing funds from your retirement account, just hoping that it’s not too much. If it is, you’ll go broke before you leave this world, and that can’t be a very fun experience.
How To Withdraw Your Retirement Funds Effectively
Within my lesson, the instructor briefly touched on taxes in retirement. Did you know that different investments are taxed at different rates? And, since the taxation is not consistent, there is actually a withdrawal strategy to make your money last longer (ie. taxed less).
Many people believe that you shouldn’t touch your 401(k) until you absolutely need the money (or are forced to by the government). I understand that you’d like your money to earn compound interest for as long as possible, but this is not always the best option.
If you have a large amount of money in your fund and are forced to remove a portion of it, those funds are going to be taxed as “ordinary income”. In other words, if you are forced to remove more than $70,000 from your fund, you’ll be taxed 25% on that money. It’s best to remove a percentage of these funds on your own terms in order to pay less tax.
If you are earning money with dividends, you’ll only incur a 15% tax deduction, no matter how much you earn. This could be a great option for your retirement years.
If you have money in the stock market or real estate (or any other similar investment) and earn a profit, these increases will be taxed as capital gains. And, if they have been held for more than a year, you’ll only pay a 15% tax on this money as well.
Pay Attention to the Tax Brackets
In your retirement years, paying attention to taxes is very important. By withdrawing money carefully from each account (and making sure you don’t enter the next tax bracket), you can pay fewer taxes and therefore allow your money to last longer.
What is your plan for retirement? Have you thought about how taxes will affect those plans?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.