Navigating Tax Season When You’re Self-Employed
02/19/24
There are many reasons that someone may not be able to retire early – or even on time. However, awareness and proper planning can help make sure you stay on track.
Not being prepared for costs of medical before Medicare kicks in is a big deterrent of many not being able to retire before 65. Healthcare costs continue to be a large expense for pre and post retirees. Some studies show that medical can cost at least $250,000 on average for a retiree during their lifetime in retirement. Having to pay for an individual policy before one is eligible to apply for Medicare at age 65 can be a large and unexpected expense, even if you are relatively healthy and don't require a lot of ongoing medical attention.
Saving only or mostly pre-tax qualified assets is another deterrent. Most individuals use their 401(k) as their primary vehicle for saving for retirement. It is a great way to get current tax benefits while they are working, while in a potentially higher tax bracket. But, in retirement, their investment becomes taxable at distribution. This can be a bit of a shock when one realizes that part of your portfolio needs to be earmarked for taxes – in some cases over 25%. That can be a big haircut when you think about it. If you don't have any tax-free or non-qualified assets to use in retirement alongside your qualified (pre-tax) retirement assets, it can be hard to manage your taxes in retirement when you need an extra distribution for large one-time expenses, like a car or home repair. It could potentially push you to a higher tax bracket than you were in before and cause you to decrease your assets quicker than expected.
My advice is to plan in advance. Make sure you run some projections ahead of time to make sure you are on track. There are lot of advisors, including Blue Chip Partners, that will run financial projections to make sure your plan is on track and that you won't outlive your assets. I always recommend that my clients build an extra buffer of expenses for the "unknown" expense that we didn't know to plan for, or something unexpected that they didn’t know they would need. I would much rather be overprepared than underprepared! Telling a client that they can afford an extra vacation is better than telling a client they can’t afford any.
In addition, make sure to earmark assets for medical expenses. If you have access to an HSA, I recommend funding it and not using it to save for retirement. You can use these assets in retirement to pay for medical expenses and long term care tax free.
Consider saving and investing in a Roth IRA or other tax free vehicles if you are able. Having tax free assets in retirement can be helpful to minimize taxes in the event you have a larger need for distributions to cover one-time or unforeseen expenses.
In short, plan ahead, continue to save, make a budget, and review your retirement plan periodically to make sure you are on track for retirement on your ideal timeline.
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