Colleen Geraghty colorBy Colleen Geraghty – Prudential Advisor,  CA Ins Lic 0I89925


Like most people, you’re likely focused on how to save money on your tax returns, but it’s also important to consider how the tax decisions you make today can affect your retirement plans tomorrow. If you are within five years of retirement, it’s time to fine tune your future finances. For example, have you thought of how taxes will affect you after you say goodbye to your job? Securing retirement income and understanding how taxes apply to your money is crucial to affording to live the life you want throughout your golden years.
When you look at retirement assets through a tax lens, it becomes clear that decisions regarding the appropriate level of guaranteed lifetime income, maximizing Social Security, working in retirement and how you deploy your assets are very much linked. You should consider all of these elements in a holistic manner because, ultimately, the goal is to help make sure your assets support your desired standard of living for the rest of your life.
If you are planning your retirement, the following are some tax considerations to discuss with your tax and legal advisors:
Most people assume their personal income taxes will be lower after retirement because they won’t be generating as much income and, therefore, will be in a lower tax bracket.  But due to the recent economic downturn and losses in retirement assets, the dismal personal savings rate over the last decade, the decline of traditional pension plans, and the increase in the full retirement age under Social Security for those born after 1954, many retirees are choosing to take on part-time jobs.
Regardless of the reason for working in retirement, the income earned, combined with use of retirement savings, might create a situation where you will be taxed at the same level or an even higher rate than when you were working full time. With this in mind, it’s important to have both taxable and non-taxable retirement assets upon which you can draw in retirement so you can manage taxes and maximize your income in the long term.
     Where you retire can have a significant impact on your after-tax income because state and local taxes can affect how long your retirement savings will last.  In addition to state income taxes, there are sales and property taxes to consider. Some states derive more of their revenue from these taxes than from income taxes. You should understand how all of the taxes in the state and town in which you plan to retire will affect your income.
Another thing to consider when planning your post-retirement income is how federal and state taxes might change in the future. It’s hard to predict but a good indicator of future federal income taxes is to look at history and take an educated guess. Rates are at historic lows right now which likely mean an increase in the future. An indicator of future state taxes might be the current budget position of that state, which, at the moment, suggests many may be looking to increase its income, sales and/or property taxes in the short term.
What does this mean for retirement planning, especially in those critical five year periods just before and just after retirement? Basically, if federal or state taxes go up, your retirement savings and assets will be depleted sooner. You will have to save more to make your money last longer or you will have to adjust some of your spending habits.
As you finalize your taxes for this year, think ahead to how taxes will affect you down the road when you retire.  Now would be the time to review your retirement needs with a financial professional to make sure you are on the right track. my ad