Mid-Life Tax Check Up

A Mid-Life Tax Check Up - 2/18/08

INTRO: Once we hit our 50's discussing our financial future really means focusing on Today.

1. WE'VE CREATED A MID-LIFE TAX CHECK LIST FOR US TO FOLLOW. FIRST ON YOUR LIST, ARE YOU SAVING ENOUGH FOR RETIREMENT?

A. As a rule of thumb, you will need approximately 80% of your pre-retirement income when you stop working. If your annual income is $50,000, you'll need $40,000 in retirement. Also, you typically can safely withdraw 4 B 6% of your assets to use as income (depending on age). So if you'll have $15,000 of Social Security, you might need savings of $500,000 to allow you to safely take $25,000/year during retirement. How can you build that much savings? By maximizing retirement accounts, you can take advantage of tax savings by getting a break on your income taxes (explain) and your money will compound more quickly by growing tax-deferred in those retirement accounts.

2. SECONDLY, ARE YOUR INVESTMENTS IN THE RIGHT ACCOUNTS?

A. Not only do you need to worry about proper diversification, but in order to save on taxes, make sure any investments that may trigger a high annual tax bill are kept in qualified accounts (tax-deferred accounts) while the tax efficient ones are kept outside of that in non-qualified accounts. I read a study that showed proper allocation can improve your after-tax returns by as much as 10% over 10 years.

3. SHOULD WE BUY STICKS IN IRA'S OR 401(K)S?

A. For some people that's a great idea to lower taxes, but for others is could cause higher taxes. For example, say you buy stock and it appreciates. If it was just in your name, the tax on the dividends is capped at 15%, and the tax on the profits when you sell is capped at 15%. If you buy the same stock in your IRA, there's no tax until you take money out. But when you take money out, you pay tax at your regular income tax rates, which might be lower or higher than 15%.

4. NEXT, HAVE YOU TAKEN ON TOO MUCH DEBT?

A. If your debts are high, you may need to cut your spending and concentrate on paying the balances down so you will be able to afford that retirement you dreamed of.

B. It is important to carry the right kind of debt as well. Obviously credit card debt is bad and comes at a high price; whereas a Home Equity Loan is usually a lower interest rate and the interest can be written off on your taxes, saving you even more money.

5. AND FINALLY, IS YOUR ESTATE PLAN IN ORDER?

A. Make sure your legal documents are updated, so your estate goes in an efficient manner to your heirs and not Uncle Sam. An up-to-date and efficient plan can save your estate and your heirs a lot of time and money. For example, if you become incapacitated and you don't have a durable power of attorney, you might wind up in a guardianship, which might cost you thousands of dollars.

CLOSE: Did you pass your financial check-up?