McKonomics

Retiring in a Weak Economy

It's one of the worst things that can happen to a retiree. Just as you are about to retire or right after you retire, the market substantially declines, drastically lowering your portfolio's value. How damaging can this be to your retirement?

One study looked at the probability of a retirement portfolio lasting 30 years, based on the portfolio's performance during the first five years of retirement. The study assumed that 4% of the portfolio balance was withdrawn in the first year, with withdrawals increasing annually by 3% for inflation. The portfolio was comprised of 55% stocks and 45% bonds. If the portfolio earned between 4% and 5% annually in the first five years of retirement, there was a 74% probability that the portfolio would last for 30 years. With a return of 0% to 1% during the first five years, the probability was reduced to 50% (Source: The Wall Street Journal, June 14, 2008).

The market declines of the past couple of years, combined with decreasing housing values, have substantially reduced retirement portfolios. If you are still working, you can work longer to help overcome these lower balances. But if you are already retired or about to retire, the choices aren't as easy. Faced with that situation, consider the following tips:

• Withdraw as little as possible from your investments. If your investments have declined substantially, reevaluate your withdrawals. Withdrawing the same amount from a substantially smaller portfolio means you'll deplete the balance much sooner. At a minimum, consider freezing your withdrawal amounts and not increasing them for inflation.
• Go back to work on at least a part-time basis. By going back to work, you'll be able to reduce your withdrawals from your retirement portfolio. Even modest earnings can help.
• Set aside a cash reserve. This reserve should contain assets not tied to the stock market, totaling two to four years of retirement expenses. With the reserve in place, you'll have money for day-to-day expenses and won't be forced to sell stock investments during market declines.
• Withdraw funds in a tax-efficient manner. In general, you should consider withdrawing taxable investments first, so your tax-deferred investments can continue growing. This may also help with income tax expenses. You already paid taxes on your taxable investments, while any withdrawals from tax-deferred investments will likely be fully taxable as ordinary income.

If you would like other useful tips on how to handle declines in your retirement portfolio, please contact us.

Generation Skipping Transfer Tax Is Gone Too (for Now) But the Gift Tax Lives On

As part of the one-year repeal of the federal estate tax, the generation skipping transfer tax (GSTT) was also repealed for 2010.

The GSST is a super-confiscatory extra tax that is added on top of the "regular" gift or estate tax bill when generation-skipping transfers in excess of the exemption amount are made.

Generation-skipping transfers are those made via gifts while alive or as part of bequests after death to individuals who are deemed to be two or more generations below the giver. For 2009, the GSTT exemption was a relatively generous $3.5 million, and the maximum tax rate was 45 percent. Next year, the GSTT is scheduled to come roaring back with an exemption of only $1 million, and the maximum tax rate is scheduled to go up to 55 percent.

Estate Tax Is Dead (For Now): What to Do?

It unexpectedly happened: Congress let the federal estate tax die for 2010. Lots of people are confused about what it all means. It's no wonder ... the current situation is a huge mess that creates uncertainty for those with large estates.

 

Here is a brief discussion of how the United States arrived at this strange destination along with some ideas to discuss with your estate planning professional.

 

Repeal for 2010 but the Story Is Not Over

 

Ever since the Economic Growth and Tax Relief Reconciliation Act of 2001 became law, the estate tax has been a two-party story:

Uncle Sam Continues Health Insurance Life Ring

Although some indicators point the economy recovering, other signs are not as encouraging.

 

For example, the U.S. economy lost 85,000 jobs in December of 2009, and the unemployment rate continues at 10 percent, according to statistics just released by the Labor Department.

 

Fortunately, the federal government has provided a last-minute reprieve for some unemployed taxpayers. In new legislation, Uncle Sam extended the COBRA assistance program for some unemployed people who want to continue health insurance with their former employers. Specifically, the law made these changes:

Important Tax Figures for 2010

The following table provides some important federal tax information for 2010, compared with 2009. Many of the dollar amounts are unchanged or have changed only slightly due to low inflation. Other amounts are changing due to legislation.

Feeling Generous? Follow These Tax Rules to Ensure Deductions

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following guidelines and reminders about the rules:

Guidelines for Monetary Donations

To deduct a monetary charitable donation, regardless of the amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution.

H.R. Bill 436: The Storm That Could Destroy Your Estate Plan

Now is the time to proactively implement your estate plan! Why now you ask? Our answer is this....would you consider a potential increase in the value of assets that you intend to transfer to your next generation of up to 40% or more to be important to your estate plan?

Interested? Read on.

Year End Tax Planning - Businesses: Smart Moves To Take Before December 31

As December 31st approaches, where does your business stand on taxes? By making timely moves, you might be able to put a sizeable dent in your 2009 business tax bill. Here are some strategies to consider.

 

Unpack new equipment. This year's economic stimulus law extended the enhanced Section 179 deduction for another year. The maximum deduction in 2009 for business assets is generally $250,000. In addition, you may be able to claim a 50 percent "bonus" depreciation deduction on any excess cost.

 

Reminder: To qualify for either tax break, you must "place the property in service" before 2010.

Year End Tax Planning - Individuals: Mix Old Strategies With New

Tax planning can be critical at the end of the year. Here are some new ideas to contemplate, along with tried-and-true year-end tax techniques.

 

Get a new set of wheels. Under this year's economic stimulus law (the American Recovery and Reinvestment Act of 2009), you can deduct the sales and excise taxes attributable to the first $49,500 of the price of a new vehicle purchased before 2010. However, this deduction begins to phase out if your modified adjusted gross income (MAGI) exceeds $125,000 for single filers and $250,000 for joint filers.

 

Give to charity. If you donate to a qualified charitable organization, you can generally deduct the full contribution amount on your 2009 tax return. Note that donations made by credit card are deductible for this year even if you don't pay the bill until next year. Be aware you must observe strict recordkeeping requirements for all donations.

Pending legislation spurs analysis of tax increase scenarios for high income taxpayers

From AccountingWEB.com - The Senate health care reform bill, The Patient Protection and Affordable Care Act, now on the floor for debate, contains a provision for a .5 percent surtax on earned income of high income taxpayers, the first time a revenue raiser has been considered by the Senate that did not connect directly to health care. Deloitte Tax LLP has prepared scenarios that illustrate the potential impact of this surtax and the additional taxes likely to result from Obama's budget proposals on the tax liabilities of high income individuals.

 

"The introduction of this surtax [in the Senate bill] is significant," says Clint Stretch, Tax Principal at Deloitte Tax LLP, "because the proposed bill suggests that Majority Leader Reid is moving tax toward the House proposal in very small steps.  What he does is reduce the Cadillac plan tax and pays for that with the HI (high income) tax.  That tax is simply a surcharge on wages at a much lower rate and with a much lower threshold than the House proposal."