Tuesday, September 11, 2007

Is There a Chance You Will Outlive Your Savings?

In recent surveys one of the biggest concerns of retirees is that they will run out of savings or not have enough money to live on down the road.

Between inflation, health care, long term care, the uncertainty of social security and nonexistent or dwindling retirement and/or pension income, it is a very valid concern.

For many, appreciated assets such as real estate, their businesses, stock portfolios, or professional practices are intended to be the mainstay for retirement purposes.

Often, 20, 30 or even 40 years have been spent in the accumulation phase. The value of the asset has probably increased many times over. It is reasonable to think that this increase is yours to keep when it comes time to sell.

The reality is that depending on the asset and how it is held, 15-50% of your profits might be given in the form of taxes to the IRS, never to be seen again. Can you really afford to lose that much and still survive financially throughout your remaining retirement years?

Even if you can, do you want to?

A common thought is to pay the tax and reinvest what is left over. Sounds good, right? You’ll be back to where you started in no time. Chances are good that you are wrong again.

If you are close to or in retirement, you need to protect this money, as you cannot afford to lose any via a risky investment. There is no longer time to recover large losses because you are not working as much or at all. You also have to realize you will be draining this asset over time to live on, so each year less interest will accumulate.

So, you have to put it in a relatively safe investment. Safe investments tend to have low returns. Often these returns are taxable, so the proceeds are further lowered by income tax. You’ve just given away a good portion of your asset sale to taxes, and now that lump sum goes to work at low interest rates, it decreases over time, and the interest is often taxable.

If it is invested in a less liquid area such as real estate or annuities, you won’t be able to easily access your principle in large amounts anyway. Borrowing equity from a property means making payments to a lender, and where is the repayment money going to come from if you are not working?

Look at how long you have held your asset and how often you have ever needed a large lump sum all at once. The income you received was most likely on a monthly basis all along, either as rental or business income. Don’t forget, if you do need a large sum for some reason, you still have collateral the bank recognizes to borrow against, or you might keep some as cash for emergency purposes.

The bottom line is that you, the seller, often benefit most when you retain as much of the asset appreciation as possible, defer or spread out the tax obligation for as long as possible, and receive a guaranteed monthly income over a number of years or the rest of your life depending on how you set it up. This is the philosophy of retirement plans, pensions, annuities, social security and all other forms of retirement income vehicles.

Ask yourself if it is your goal to have enough money to live on forever, or if you want to face the dilemma of re-entering the work force at an advanced age to make ends meet? That is, if it is even possible due to inevitable health constraints and job availability.

Don’t think with a short term vision. Look far into the future and take steps to secure it for you and your family.

Paula Straub
http://www.savegainstax.com/
askpaula@savegainstax.com
760-917-0858

Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax at:
http://www.savegainstax.com/qq.html

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