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The Taxman Cometh?

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"Anyone who says businessmen only deal in facts, not fiction, has never read old five-year projections."
  ~ Malcolm Forbes, Forbes Magazine

The financial plans created by BWFA project our clients' income and expenses many years into the future. Unfortunately, sometimes life gets in the way, and we hit a bump in the road.

During his presidential campaign, President Obama pledged to raise income taxes only on those Americans earning over $250,000. Many people believe that income tax increases are inevitable and will not be limited to those with incomes over $250,000. We don't know what the president and Congress will decide to do, but we can take a look at our financial plan projections and model tax increases into the plan.

We recently completed a plan for a married couple who are in their early 50s and in the 35% (28% federal and 7% state) income tax bracket. We learned that they will need to adjust their savings to get on track for retirement, and I'm confident that they will do it. But what would happen to their new plan if their taxes (income or property) were increased by 5 percentage points?

Our analysis raised several possibilities for them. They could:

• Reduce spending in retirement. Our clients had planned to retire at age 65 with an after-tax spending level of $105,500 per year. If they maintain their current savings level, and federal income taxes are raised by 5 percentage points, they could still retire at 65, but their after-tax spending level would need to fall to $98,400. That's an annual reduction of $7,100.
• Save more. Our clients might not like the option of a lower standard of living. So they could build a larger nest egg that would produce the same after-tax income. In this scenario, they would need to increase their savings by $14,400 a year in order to maintain their desired age 65 retirement date and after-tax spending level of $105,500.
• Work longer. Alternatively, our clients could work one additional year and retire at age 66; this would produce an after-tax spending level of $104,000. For these clients, delaying retirement by a year seems to be the easiest option. Not only would they contribute to their investment accounts from their working income, but they would delay withdrawals from their nest egg by one year.

We don't know if or when there will be a tax increase. But we know that situations change. That's why we recommend that clients complete Financial Plan Reviews at least every two years.

Let us help you decide how to stay on your path to retirement. If you would like to schedule a financial plan review, contact Mark Stinson. To find out how a financial plan can help you, contact Scot Millen at 410-461-3900.

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