Atlantic Capital Management

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Examining a long-held retirement planning assumption.

A classic retirement planning rule states that you should retire on 80% of the income you earned in your last year of work. Is this old axiom still true, or does it need reconsidering?

Some new research suggests that retirees may not need that much annual income to keep up their standard of living. 

The 80% rule is really just a guideline. It refers to 80% of a retiree’s final yearly gross income, rather than his or her net pay. The difference between gross income and wages after withholdings and taxes is significant to say the least.1 

The major financial challenge for the new retiree is how to replace his or her paycheck, not his or her gross income.

So concluded Texas Tech University professor Michael Finke, who analyzed the 80% rule last year and published his conclusions in Research, a magazine for financial services industry professionals. Finke noted four factors that the 80% rule does not recognize. One, retirees no longer need to direct part of their incomes into retirement accounts. Two, they no longer involuntarily contribute to Social Security and Medicare, as they did while working. Three, most retirees do not have a daily commute, nor the daily expenses that accompany it. Four, people often retire into a lower income tax bracket.1

Given all these factors, Finke concluded that the typical retiree could probably sustain their lifestyle with no more than 77% of an end salary, or 60% of his or her average annual lifetime income.1 

Retirees need to determine the expenses that will diminish in retirement. That determination, rather than a simple rule of thumb, will help them realize the level of income they need.

Imagine two 60-year-old workers, both earning identical salaries at the same firm. One currently directs 25% of her pay into a workplace retirement plan. The other directs just 5% of her pay into that plan. The worker deferring 25% of her salary into retirement savings needs to replace a lower percentage of their pay in retirement than the worker deferring only 5% of hers. Relatively speaking, the more avid retirement saver is already used to living on less. 

New retirees may not necessarily find themselves living on less. The retirement experience differs for everyone, and so does retiree personal spending.

As a recent Employee Benefit Research Institute study noted, household spending typically declines 6% in the first two years of retirement, with additional declines thereafter. This is not the story for all retirees; EBRI also found that almost 46% of retiree households increased their spending in the initial two years of retirement. On the other side of the scale, nearly 40% of the retiree households EBRI studied saw their expenses fall by at least 20% within two years of retiring.2

A timeline of typical retiree spending resembles a “smile.” A 2013 study from investment research firm Morningstar noted that a retiree household’s inflation-adjusted spending usually dips at the start of retirement, bottoms out in the middle of the retirement experience, and then increases toward the very end.2

A retirement budget is a very good idea. There will be some out-of-budget costs, of course, ranging from the pleasant to the unpleasant. Those financial exceptions aside, abiding by a monthly budget (with or without the use of free online tools) may help you to rein in any questionable spending. 

Any retirement income strategy should be personalized. Your own strategy should be based on an accurate, detailed assessment of your income needs and your available income resources. That information will help you discern just how much income you will need when retired.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - marketwatch.com/story/you-may-need-less-retirement-income-than-you-think-2015-11-30 [12/24/15]

2 - money.cnn.com/2015/12/02/retirement/retirement-income/ [12/2/15] 

Friday, 18 March 2016 15:54

Consider an IRA Charitable Rollover

Written by

If you want a tax break and want to help a non-profit, this may be a good move.

Have you ever wanted to make a major charitable gift? Would you like a significant federal tax break in acknowledgment of that gift? If so, an IRA charitable rollover may be a good financial step to take.

If you are age 70½ or older and have one or more traditional IRAs, you may want to explore the potential of this tax provision, first introduced in 2006 and recently made permanent by Congress. In the language of federal tax law, it is called a Qualified Charitable Distribution (QCD) – a direct transfer of up to $100,000 from the IRA to a qualified charity.1,2

An IRA charitable rollover may help you lower your adjusted gross income. That may be a goal in your tax strategy, especially if your AGI is large enough to position you for increased Medicare premiums, greater taxation of your Social Security benefits, or exposure to the 3.8% investment income tax and the 0.9% Medicare surtax. If your AGI passes a certain threshold, you also lose the ability to itemize deductions.2

Up to $100,000 may be excluded from your gross income in the year in which you make the gift. The gifted amount also counts toward your Required Minimum Distribution (RMD).1,2

By the way, this $100,000 annual QCD limit is per individual. If you are married, you and your spouse may gift up to $200,000 in a year through IRA charitable rollovers. Imagine lowering your household’s AGI by as much as $200,000 in a tax year.2

A QCD will not afford you an opportunity for a charitable deduction. That would amount to a double benefit for the taxpayer making the gift, which is not something federal tax law allows.3

You need not be rich to do this. When many people first learn about the IRA charitable rollover, they think it is only for multi-millionaires. That is a misconception. Even if you do not think of yourself as wealthy, a QCD could prove a significant element in your tax strategy.

How does it work? Logistically speaking, an IRA charitable rollover is a trustee-to-trustee transfer: the IRA owner does not take possession of the money as the gift is arranged. Rather, the custodian or trustee overseeing the IRA writes a check for the amount of the gift payable to the charity. It is a direct transfer of funds, not a withdrawal.2

An IRA owner must be age 70½ or older to do this, and he or she must be the original owner of the IRA (an inherited IRA may not be used). The gifted assets must come from an IRA (or multiple IRAs) subject to RMD rules. SEPs and SIMPLE IRAs are ineligible if an employer contribution has been made for the particular year.4,5

Can you gift appreciated securities as well as cash? You can. Securities held within an IRA may be directly transferred from an IRA to a qualified charity in a QCD. You can claim an income tax deduction for the full fair market value of those securities.4,5

The charity or non-profit involved must pass muster with the IRS. It must be an entity that qualifies for a charitable income tax deduction of an individual taxpayer, and it cannot be a donor-advised fund, a private foundation that makes grants, or a supporting organization under Internal Revenue Code Section 509(a)(3). The charity must provide you with a letter of acknowledgement denoting that you received no goods, services, or benefits of any kind in exchange for your gift, and that you shall not receive any in the future as a consequence of your gift. If that letter is not quickly sent to you, be firm in requesting it.4,5

In case you are wondering, you can actually contribute more than your IRA RMD amount for a particular year through an IRA charitable rollover, as long as the gifted amount does not exceed $100,000. If you pledge a donation to a qualified charity or non-profit, an IRA charitable rollover can be used to satisfy your pledge.5

This tax break has been a boon to charities and IRA owners alike. Correctly performed, a charitable IRA rollover may help to lessen tax issues while benefiting qualified non-profit organizations.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - marketwatch.com/story/ira-charitable-rollover-provision-made-permanent-2015-12-25 [12/25/15]

2 - forbes.com/sites/jamiehopkins/2016/01/20/why-retirees-need-to-stop-writing-checks-to-charities/ [1/20/16]

3 - cof.org/content/analysis-ira-charitable-rollover-extension [12/22/15]

4 - wealthmanagement.com/retirement-planning/ira-qualified-charitable-contributions-reinstated-made-permanent [12/21/15]

5 - forbes.com/sites/berniekent/2015/12/20/should-you-make-a-charitable-contribution-from-your-ira/ [12/20/15]

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