When you exit a job, it’s important that you keep track of the benefits you’ve earned during your tenure. Many employees leave their retirement earnings behind at their former employer, unable to update their retirement accounts to align with the changes in their lives. Whether you transition to a new job or retire from the workforce, maintaining continuity with your retirement plan is paramount. If you elect to cash out your 401(k), you can lose significant value of your accumulated retirement funds because of tax liabilities, penalties, or both.
In this situation, you may want to consider an IRA rollover account. An IRA rollover allows you to carry over your retirement benefits, while retaining the tax-deferred status it had with your former employer. Once converted to an IRA rollover account, you may have the choice to explore other financial products, like annuities or life insurance.
Healthcare Costs In Retirement
For many retirees, the cost of healthcare will represent the biggest expense they face in retirement. This is why you should factor healthcare costs into your retirement planning early on. A recent study by Fidelity estimates that a couple retiring at age 65 will spend $245,000 on healthcare during retirement. While this figure includes Medicare premiums and associated costs, it does not include long-term care.
The actual amount you and your spouse spend may be more or less than this figure, however, the study is an important reminder that the cost of healthcare can significantly impact your retirement savings.
Remember that Medicare is also subject to premiums, deductibles and co-pays and may not cover every service you need. Part A is generally premium-free, but carries a $1,288 deductible for each benefit period. Part B incurs are monthly premium of $104.90 and a deductible of $166 per year. Once your Part B deductible is met, services are typically subject to an 80/20 split, you responsible for 20% of the costs of the Medicare-approved amounts for services. Part D costs will vary greatly among plans and providers.
Based on recent estimates by Genworth , the median cost of a year’s worth of care in assisted living is around $43,536. The median cost of a year’s worth of skilled nursing care in a semi-private room is $82,128. Between Medicare expenses and the possibility of a long-term care condition, it’s easy to imagine how your retirement plan could be impacted.
See also: Long-Term Care Insurance
How Inflation and Taxes Impact Your Portfolio
When you plan for retirement, you are not saving for today’s economic environment, but the for the environment you’ll enter when you retire. A difference of five or ten years can have a significant impact on your retirement portfolio because inflation and taxes can erode the real value of your retirement dollars.
For instance, according to the Bureau of Labor Statistics’ inflation calculator, $150,000 in 2006 has the same purchasing as $179, 633.93 in 2016. This means that real value of the amount (that is the purchasing power) has decreased by nearly $30,000.
This is why keeping large sums of money long-term in CDs or bonds can be detrimental. These products may provide overall safety, but generally offer low interest, often around 1 or 2%. If inflation increases faster than the rate of growth, then the actual value of the account will be decreased upon distribution.
Likewise, you don’t know what the tax environment will be when you begin to draw on your retirement income. The tax rates you face on taxable portions of retirement sources may be lower or higher than what they are today. And depending on how the source is structured, you may face taxes on yearly gains or upon distribution.
Tax-planning is an important aspect of your overall financial plan, and we are here to help you navigate the impact of inflation and taxes on your portfolio.
See also: Tax-Planning, Retirement Planning
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