By Timothy Barrett, Argent Trust Company
Congress just passed major changes to the federal tax code and many states may follow suit to recapture revenue affected by these new laws.
2018 brings lower income tax rates for individuals and corporations and greatly reduces revenue from gift and estate taxes. Does it also starve the federal government of critical tax revenue? We are told that Medicare, Social Security, Medicaid and qualified retirement plans are under study for future changes to reduce expenditures, such as replacing some of all the Affordable Care Act, Medicare and Medicaid with block grants and health savings accounts. All these changes may well increase the U.S. GNP, but with already record low unemployment and record high stock market values, I wonder how much that needle can really move?
Whether you’re nearing retirement or are years away, know that you may well be more reliant on your own savings than on any federal benefits. However, the retirement health of the nation is not good. The Government Accounting Office recently reported that nearly 29 percent of households with workers aged 55 and older do not have any retirement savings and are not going to retire with a pension. Workers aged 55 to 64 years old have saved only about $104,000 on average so far. Older workers, between age 65 and 74, clearly ready to retire, have saved only about $148,000 on average. What does that mean in the long run? It means that a savings of that amount will allow the retiree to cover only about $300 to $600 in monthly expenses over his or her remaining life expectancy.
Social Security remains a fundamental part of most Americans’ retirement plans, with benefits providing most of the income for about half of households age 65 and older. The average social security retirement benefit is about $1,294 a month. If you add that amount to $600 a month from a retirement plan, the average retiree has an annual income of $22,728!
Think you could live off of that at retirement? If not, prepare by adding to your retirement plans now. For instance, if you’re 40 years old and want to add $500,000 in today’s dollars to your $100,000 retirement account by age 65, you must save $15,300 every year to retain your spending power. But just how much is going to be enough?
Time and again, my clients are surprised by several experiences that they didn’t expect after retirement. Most discover that they actually spent more money in the first two years of retirement than they did in the last two years working. Many find that they had no more free time for their hobbies and interests than they could make when they were working. Why is that?
In many cases, the lack of free time and the extra expense went hand in hand with the plans and needs they had not been addressing while working. They had put off travel, home projects, renovations, or trips to see family or ancestral homes. I often hear people say they wished they’d taken care of this or that while they still enjoyed the income from employment. For a few, the extra expenditures either forced them back into their old job or into part time employment or consulting. Our clients that enjoy a sustainable retirement often credit their diligence in meeting savings goals, avoiding revolving credit debt and living within their means.
Preparing for retirement is not an exact science and saving for it means facing some raw truths. The earlier you commit to a retirement funding program and the more you resist financing your lifestyle, the more successful you will be. Argent Trust Company can help you develop that plan but you have to begin well before you retire.
Stayed tuned next month when Argent Trust Company Asks: Who Understands Special Needs Trusts?
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Timothy Barrett is a Senior Vice President with Argent Trust Company. Timothy is an attorney and wealth strategist who develops tailored proposals to protect, manage, and grow clients’ wealth with an emphasis on business succession, transfer and sales strategies for entrepreneurs.