Times in Life When You Should Pause or Slow Down on Saving for Retirement

Times in Life When You Should Pause or Slow Down on Saving for Retirement

Saving for retirement is an essential financial goal, but there are certain circumstances in life when it may be best to push pause on retirement contributions. By recognizing these situations, you can better allocate resources and make informed decisions. Below we discuss the times in life when slowing or pausing retirement savings goals could be the right call.

Debt and Financial Stability

If you are burdened with high-interest debt, such as credit card debt or student loans, it’s important to allocate more funds towards debt repayment before saving for retirement. Reducing debt obligations will improve your financial stability and free up resources for retirement savings in the future.

Job Loss or Career Transition

If you’ve lost your job, it’s a good idea to pause retirement contributions temporarily until your financial situation has improved and you are once again steady in the workforce. When you decide to restart retirement savings, be sure to take advantage of any 401(k) matches that your new employer may provide.

Likewise, when you are in a career transition, whether that be changing your career path or starting a new business venture, it might be necessary to redirect funds to supporting your career goals or acquiring new skills in your industry.

The above situations might call for a pause on retirement savings, but not a full stop. If you are in a position of needing to pause retirement savings, it’s essential to have a plan to resume saving once the transition is complete and you are back on your feet.

Major Life Events and Unforeseen Circumstances

Life happens, and sometimes we’re faced with a financial hardship. Unexpected medical expenses and major life events, such as having a child or making a cross-country move, can impact your finances. During these times you may need to adjust your retirement savings strategy to meet these needs. Pausing or slowing down retirement savings temporarily can provide flexibility while protecting some financial stability. Once you’re back on your feet, you can revisit your retirement savings strategy and make adjustments accordingly.

The above examples are all valid reasons to readjust your financial priorities and push pause on saving for retirement. By recognizing these situations and making informed decisions, you can maintain a financial balance and step up your retirement savings game once you’re in a less financially tumultuous phase of life.

Small Businesses Can Dodge the Attention of the IRS by Avoiding These Tax Mistakes

Small Businesses Can Dodge the Attention of the IRS by Avoiding These Tax Mistakes

Filing taxes puts stress on small business owners, because most know that mistakes on business tax returns can affect your business’s success. Here are some common tax mistakes to avoid.

Mixing Business and Personal Expenses

Be sure not to report personal expenses on your small business’s tax return. It’s always a good idea to have separate credit cards, bank accounts, and filing folders for each. Sometimes an expense isn’t as cut-and-dry and you may have difficulty determining if it is indeed business or personal. In this case, turn to the IRS’s Publication 535 at www.irs.gov, which provides an overview of expenses that are and are not deductible.

Being Disorganized with Recordkeeping

This may seem like second nature to some business owners, but staying on top of tax documents, receipts, and copies of bank and credit card statements will go a long way toward avoiding overwhelm at tax time. While you don’t need to submit receipts or other proof of tax deductions to the IRS, you will need them on hand if the IRS decides to probe into your taxes further. If you get audited and you don’t have required documentation on hand to prove any claimed deductions, your tax bill could increase significantly.

Filing the Wrong Tax Forms

There are different types of tax forms required for different types of businesses (C corporations, S corporations, etc.), and if you have employees, you’ll need to fill out additional forms that document their payment through the year. Simply put, it can be a lot to track. A tax advisor can help you determine which forms you should be filling out.

Taking Too Many Deductions

Simply stated, taking deductions means that you get money back for certain purchases that assisted your business. Just keep in mind that too many deductions could raise a red flag for the IRS. If you’re unsure, a tax advisor can ensure that you’re adhering to deduction limitations and only claiming expenses that qualify.

Forgetting or Underestimating Your Tax Payments

Many small business owners are required to make quarterly estimated tax payments. Typically, the deadlines for these payments are the 15h of April, June, September, and January of the following year. How much you owe is based on your income. If you miss a payment, or if your payment falls short of your actual tax liability for the year, the government could saddle you with penalties, thereby increasing your tax liability. Furthermore, if the IRS suspects an intention to defraud it, the fine can be as high as 75%, and you could face criminal tax fraud charges.

Here’s What Retirees Can Expect from Social Security Benefits in 2023

Here’s What Retirees Can Expect from Social Security Benefits in 2023

Retirees are feeling the effects of soaring inflation, and it’s stretching their budgets. More than 70 million retired Americans depend on a Social Security benefit program as a source of income, especially during economic downturns, so annual changes to payouts are always expected. Read on to learn what’s in the cards for Social Security benefits next year, including a higher payout.

COLA Boost

Get ready for a historic increase to 2023’s cost-of-living adjustment (COLA). 2022 saw an adjustment of 5.9%, which was already uncommonly high, but in 2023 monthly checks will increase by 8.7%. That’s approximately $146 per month ($1,752 per year) for the average retiree. This is the highest COLA increase since 1981. All retirees currently receiving Social Security benefits will see this increase in January of 2023.

Maximum Taxable Earnings Will Increase

Due to an increase in average wages, Americans will see more Social Security taxes taken from paychecks in 2023 because more of their income will be liable for the tax. Maximum earnings subjected to Social Security taxes will increase from $147,000 in 2022 to $160,000 in 2023. This means that workers paying into the system are taxed on wages up to this amount, typically at the 6.2 percent rate.

Maximum Social Security Benefit Also Set to Increase

The maximum benefit for retired workers who claim Social Security at full retirement age — which is 67 for anyone born after 1960 — will be $3,627 in 2023, up 8.4% from $3,345 in 2022. Take note that the maximum benefit will be different for those who claim benefits before the full retirement age, and the same can be said for those who claim benefits after the full retirement age. For instance, if you begin claiming benefits at age 62, your maximum monthly benefit in 2023 will be $2,572. On the other end of the spectrum, if you begin claiming benefits at age 70, your maximum monthly benefit in 2023 will be $4,555.

Work Credits Will Be Harder to Reach

In order to earn retirement benefits, workers must accumulate at least 40 work credits during the whole of their careers. The maximum number of credits eligible to be earned per year is four, and the value of each credit fluctuates from year to year. In 2023, a single credit will be worth $1,640, up from $1,510 in 2022. Thus, workers will need to earn more income in order to collect the credits they need to retirement benefits.

 

 

How Retirees Can Use the Safe Withdrawal Rate Method to Avoid Running Through Savings Too Soon

How Retirees Can Use the Safe Withdrawal Rate Method to Avoid Running Through Savings Too Soon

Retirees can determine how much money they can withdraw from their accounts each year without depleting their nest egg prematurely by using the safe withdrawal rate (SWR) method. This approach attempts to balance your expected income needs to live comfortably without the risk of running out of money by withdrawing too much too soon. While it is based broadly on your portfolio’s value at the start of retirement, you must also consider the total amount of your savings and other intended retirement income, including the progressing growth of your investment accounts, as well as your expected expenses each year.

How to Calculate a Safe Withdrawal Rate

The safe withdrawal rate helps retirees figure out a minimum amount to withdraw in retirement to cover basic needs, including housing, electricity, food, and transportation. In 1994 financial planner Bill Bengen came up with the 4% annual withdrawal rate, and this has been used ever since as the rule of thumb when determining the safe withdrawal rate. (In 2018 Bengen amended this amount to 4.5% to account for inflation.) According to the 4% rule, retirees withdraw no more than 4% of their starting balance each year. While this approach isn’t foolproof against depletion, it protects portfolios against market downturns by limiting withdrawal amounts. These limitations give retirees a much better chance of their portfolio enduring the length of their retirement.

To get started you would withdraw 4% in the first year of retirement, then increase that amount by the amount of inflation in following years.

If your nest egg is $200,000:

  • Year 1: 4% of $200,000 = $8,000
  • Year 2: providing for a 3% inflation rate, you would withdraw $8,240
  • Year 3: providing for a 2% inflation rate, you would withdraw $8,404

Of course, you can always make adjustments to these numbers based on stock market performance and the value of your portfolio year to year — increasing the withdrawal rate if your nest egg is growing and decreasing the withdrawal rate if your portfolio value is dropping.

A Shortcoming of the SWR Method

A weak point of the SWR method is that it doesn’t account for economic volatility, asset allocation, and investment returns. Essentially, it’s a blanket method that doesn’t always apply to individual circumstances. A trusted investment advisor can help retirees determine the appropriate safe withdrawal rate based on their unique portfolio.

In Favor of the SWR Method

On the flip side, the safe withdrawal rate method is easy to understand, provides a predictable and steady income, and offers a clear path for retirees to better control their expenses.

While the 4% rule has traditionally protected retirees from running out of money, there are alternative methods that might be a better fit for you. A financial advisor can help determine how much you need to save and how much you can comfortably spend each year to avoid depleting your nest egg too soon.