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When doing your retirement planning, there are many things you need to consider, not the least of which is the sacrifices you need to make while accumulating the wealth that will provide you with sufficient retirement income for the rest of your life. Often retirees continue to make sacrifices in order to leave their children and grandchildren legacies. But is this necessary?

One of my favorite bumper stickers often seen on the back of RVs is the one that says: "We’re spending our kids’ inheritance.”

The folks inside the RV have figured out what it takes to permanently retire and have enough money to enjoy a leisure lifestyle for the rest of their natural days. And if this means not leaving anything to their kids, well, that’s okay.  Of course, this might not be everyone’s goal, but it’s important to go through the thought process in order to establish realistic goals for your own retirement.

In planning for retirement you need to estimate how much money you need to accumulate in order to provide sufficient income on which to live the rest of your life. You may get some retirement income from an employer sponsored retirement plan. Some income will probably come from Social Security Benefits. But if these sources of income won’t be enough, then you will need to accumulate assets that can be converted to cash to make up the difference.

There are many ways to accumulate assets for retirement. You can set up your own individual retirement plans, invest in stocks, bonds, and mutual funds, buy cash value insurance or annuities, or invest in other assets such as real estate.

But before you start investing, do some homework. How much will you need to accumulate? Don’t have a crystal ball?  That’s okay. You can make estimates and as long as you adjust them as you go along, you should be okay.

Start by figuring out how much money you need to live on today in order to do the kinds of things that you think you would like to do when you retire. Of course it’s likely to cost more by the time you get around to retiring because of inflation, but don’t worry about that just now. Next figure out how much money you are likely to get from retirement plans and pensions at work—ask your employer’s retirement plan advisors. Add to that the amount you anticipate you will get from Social Security Benefits (yes, they will probably be there, however you may have to wait longer to get them or the benefits might be lower than they are today, but there will be something). You should be automatically getting an annual statement from the Social Security Administration that will give you the estimated benefits you will get when you retire at various ages. The difference between what you get from pensions and Social Security and what you need is the amount you will need to provide through your own savings and investments.

To figure out how much you need to accumulate, you need to know how long it’s going to take you to spend it. When you retire and are no longer earning any money, you will start to spend the income and principal from what you’ve accumulated. This has to last as long as you live. This is a factor of your age when you retire. If you live to be a hundred and retire at 55 you have 45 years to spend your wealth. If you retire at 65, you have 35 years. The younger you retire, the more wealth you need to accumulate because it has to last longer. Just how long are you going to live? See IRS Publication 590 Appendix C (available online at www.irs.gov) for some insight into that question.

Consider the following.  The sooner you start saving for retirement, the more you will accumulate by the time you retire. The more money you can save without having to pay taxes, the more you will accumulate and have to spend—seek out tax advantaged investments. If you save at rates above inflation you will have more to spend when you are ready to retire. Manage your risks of financial loss due to disability, sickness, death, and legal action—have a sensible insurance program.

If you are one of the very rare few who are able to accumulate sufficient assets so you needn’t spend any of the principal you’ve accumulated, then you can leave your heirs a nice inheritance.  But if you are like most folks, you may just have to spend your kids’ inheritance to retire in the manner you desire.

Who Thinks Up This Stuff?

The IRS keeps a list of notorious tax scams called the Dirty Dozen.  These are scams which have been tried – literally tried in various courts – and found to be based on specious arguments. 

There they are for all to see.  They include the old classic which says that the Sixteenth Amendment giving Congress the right to collect income taxes wasn’t ratified, that wages aren’t income, that filing a return and paying taxes are merely voluntary.  Nope.  It was; they are; and you must.

Also on the list is the issue of foreign income. Tax preparer Douglas Rosile Sr. and Eddie Ray Kahn, founder of American Rights Litigators (and its successor, The Guiding Light of God Ministries), took an interesting position and counseled their clients accordingly.  Their thinking goes something like this:  Section 861-865 of Title 26 of the tax law states that foreign income is taxable.  But Section 861-865 only mentions foreign income.  Therefore, all other income, such as that earned here in the US on non-foreign soil, since it isn’t specifically mentioned, must not be taxable.  Following that?  The argument is that since non-foreign income is not specifically included, it must be excluded.

Give ‘em credit for creativity.

Anyway, their logic sounded good to actor Wesley Snipes.  He stopped paying income tax because, according to the Section 861 argument, he didn’t have taxable income.  And, with the assistance of Rosile and Kahn, he filed amended returns for 1996 and 1997, claiming a refund of about $12 million. 

And the IRS issued the refund.

Then they took a closer look.  And the whole mess wound up in court. In early 2008, Snipes was convicted on three misdemeanor counts of failing to file a tax return.  But he was found not guilty of federal tax-fraud. What saved him was that over the years of litigation, he had repeatedly asked the IRS to prove to him that he did have to file and pay taxes. This convinced the court that there was insufficient evidence that Snipes had acted with the intent to defraud, only that he believed his advisors.  His advisors, Rosile and Kahn, were convicted of tax fraud.

Of course, if the IRS had taken the closer look before they issued the refund, they’d have saved everyone a lot of time and money, but that’s another story.

Financial Brief

Should you put money into a Traditional IRA or 401(k) and take a tax deduction or put the money into a Roth IRA or Roth 401(k) and get tax free distributions? It depends. To answer that question you need to be clairvoyant. Here’s why.

If you are in a higher tax bracket today than you will be when you take distributions in retirement, then saving money pre-tax makes more sense. But if you are in the same or higher tax bracket when you take distributions, then you will be paying higher taxes in the future. In this case tax free withdrawals would work out better.

But what if you put money into a Roth and get no tax benefits today, and then the tax law changes to a flat tax on earned income or even a national sales tax, then you won’t get any tax benefits in the future either. Hmmm!  See what I mean about being clairvoyant?

Shameless Plug

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